Essays on imperfect pass-through and imperfect financial integration

This dissertation studies the role played by openness on the degree of pass-through from exchange rates to import prices, and the effect of incomplete and imperfect financial integration on the risk sharing across countries. In the first essay, which is joint work with Claudio Soto, we develop a general equilibrium model where countries do not fully specialize according to their comparative advantage. We show that the less open is the country, the lower is the pass-through from exchange rate to import prices. As a result, purchasing parity power (PPP) does not hold, and real exchange rate fluctuations in response to monetary shocks depend on the degree of openness of the country. Similarly, the correlation between the terms of trade and exchange rate may be positive or negative depending on the degrees of openness.; In the second essay, which is joint with Vicente Tuesta, we assess the importance of financial frictions in the lack of risk-sharing across countries by constructing an incomplete market model with stationary net foreign assets (NFA) and imperfect pass-through (IPT). In the model, there is a cost of bondholdings that allows us to incorporate the dynamics of NFA into the risk-sharing condition. Our results suggest that the NFA may account for the lack of risk-sharing across countries. In addition, the IPT mechanism, by closing the current account channel, does not help to explain this feature of the data.; In the third essay, we analyze the empirical implications of imperfect financial integration in the risk-sharing condition and uncovered interest rate parity (UIP). Empirical evidence against both the risk-sharing across countries and UIP has been extensively documented. Under imperfectly integrated financial markets both the risk-sharing condition and the UIP are affected by the NFA. We test empirically this asset market structure, finding relatively strong evidence in favor of an important role of the NFA position explaining the lack of risk-sharing. On the other hand, the evidence is not robust with respect to the UIP since the NFA position does not reflect a time-varying risk premium for some countries.