Essays in Econometrics and International Economics

This dissertation presents three essays in econometrics and international economics.;The first chapter displays a Bayesian econometric framework for evaluation of dynamic stochastic general equilibrium (DSGE) models. Like Del Negro and Schorfheide (2004), the framework uses a structural vector autoregression (SVAR) model as a benchmark. It improves on the earlier framework by providing a clear and less arbitrary mapping between the DSGE identification and the SVAR identification. Additionally, it imposes the identifying restrictions of a DSGE model with increased uncertainty on the benchmark SVAR model when the DSGE model fits poorly.;In the second chapter, I apply the econometric framework of the first chapter and evaluate a two-country DSGE model for the U.S. and Europe, which leads to two main results. First, a benchmark SVAR model achieves a substantially better data fit than does the two-country DSGE model. I present evidence that the output and real exchange rate responses to a technology shock and a demand shock are important sources of misspecifications of the two-country DSGE model. Second, I find that the uncovered interest parity (UIP) fails conditionally for some structural shocks. Empirical open economy models often introduce a non-structural shock to accommodate the failure of an equilibrium condition for exchange rates such as the Backus-Smith condition or UIP. The idea that the failure can be ascribed to a non-structural shock, while the equilibrium condition is imposed in tracing out conditional impulse responses to structural shocks, is one important source of conflict with the data in the two-country DSGE model.;The third chapter concerns the international transmission of shocks in a two-good, two-country model in which financial intermediaries are borrowing-constrained. The model generates the international business cycle comovement through endogenous fluctuations of international relative prices. I show that financial frictions due to a borrowing constraint on banks that intermediate funds between households and firms amplify the impacts of the productivity and financial shocks domestically and across countries and further increase the international business cycle comovement. Banks are directly exposed to foreign shocks through foreign asset holdings. A negative country-specific shock deteriorates the balance-sheet condition of banks across countries, which further reduces lending to firms and deepens a recession across countries.