Essays in international macrodynamics

The first essay, entitled “Sectoral Adjustment Costs and Real Exchange Rate Dynamics in a Two-Sector Dependent Economy,” investigates dynamics of real exchange rates in a two-sector model with both capital accumulation and capital reallocation. Instead of choosing one of the extreme assumptions regarding production structure (gradual capital accumulation with instantaneous reallocation versus no reallocation), we allow the movement of capital across sectors but with costs. By appropriately parameterizing this cost, we find that the standard Heckscher-Ohlin and the sector-specific capital models emerge as two polar cases. We also get persistence of the deviation of the real exchange rate, with the persistence, and possible overshooting, of the real exchange rate increasing with the magnitude of the intersectoral adjustment costs, consistent with the evidence.; The second essay, entitled “Sectoral Adjustment Costs and The Rate of Convergence in a Two-Sector Endogenous Growth Model” investigates the speed of convergence in a Lucas type two-sector model with sectoral adjustment costs. In two-sector endogenous growth models of Lucas vintage all variables converge to their respective long-run equilibrium at the same constant rate. By introducing sectoral adjustment costs we obtain stable dynamic adjustment paths as two-dimensional manifolds. So, convergence speeds vary over time and among variables. Also, the time path of the rate of convergence depends on the size of the sectoral adjustment costs. As different countries have different sectoral adjustment costs, the cross-country variations in convergence profile can be addressed using this framework.; The third essay, entitled “How Big Is the Border Effect in Developing Countries? A Case Study of Bangladesh and India” investigates the nature and extent of the failure of the Law of One Price in developing countries. Disaggregated price data from two developing countries, Bangladesh and India, are used to test the proposition that the variation of the prices in equidistant cities located in two countries is systematically larger than that for the cities in the same country. For Bangladesh and India, the extent of failure of LOP in the short-run is found to be very significant.