Essays on forward premium anomaly and monetary business cycles in closed and open economies

The thesis consists of two parts. The first part is about the forward premium anomaly, one of the unsolved puzzles in international finance and macroeconomics. The second part is about monetary business cycles, and it focuses on the persistence of aggregate quantities such as output and real exchange rates in closed and open economies.; In the first part of the thesis, the author first presents empirical evidence that the time varying rational expectations risk premium causes the forward premium anomaly. The author, then, asks whether a general equilibrium model generates a highly volatile risk premium that explains the forward premium anomaly. The author finds that a dynamic stochastic general equilibrium model with nominal rigidities and international goods market segmentation can generate Fama's volatility relations; derived from violations of unbiasedness in the forward exchange rate markets, and variation in the risk premium observed in the data. In the second part of the thesis, the author first investigates the quantitative implications of staggered nominal contracts for output persistence in closed economies and finds that the Calvo staggered nominal contract generates higher output persistence than the Taylor staggered contract in an otherwise identical model if the same fraction of firms set their prices in each period in both contracts. Furthermore, the Calvo contract generates output persistence observed in the data. This is because the Calvo staggered nominal contract produces an index inertia that generates extra exogenous price stickiness. The author extends the analysis to open economies and investigates the quantitative implications of the Taylor and Calvo staggered contracts on real exchange rate persistence. The author finds that the Calvo staggered nominal contract in general generates more real exchange rate persistence than the Taylor staggered nominal contract under a static updating rule. However, the author finds the reverse result when in each period firms who do not have opportunities to renew their prices update them using lagged inflation rates (a dynamic updating rule) instead of using a constant steady state inflation rate (a static updating rule).