Essays on business cycles and monetary policy in open economies

This thesis is concerned with the analysis of important macroeconomic issues in open economies. The first essay investigates whether a standard real business cycle model with intratemporal adjustment costs for intermediate goods can account for international comovement. There is evidence of positive cross-country comovement between output, employment and investment. However, one-sector multi-country real business cycle models deliver a positive, but low, cross-country correlation for output and negative international comovement concerning investment and employment. In this essay, it is shown that the introduction of intratemporal adjustment costs for intermediate inputs may play an important role in generating significant levels of positive international comovement. The second essay studies the role of Vertical Specialization-based trade and foreign demand push as elements capable of explaining export-led recoveries in small open industrialized economies. I compare the performance of two versions of a small open economy model, calibrated to mimic Canadian Business Cycles. The first is a standard small open economy model. The second incorporates Vertical-Specialization-based trade. I show that an artificial economy featuring Vertical-Specialization-based trade in conjunction with an exogenous second order autoregressive process for foreign output displays improved impulse responses to a foreign output shock and is able to mimic the contribution of Canadian exports to output growth during economic recoveries. In the third essay, I compare the performance of alternative monetary rules for a small open developing economy using a welfare cost of business cycles measure. I consider a fixed exchange rate rule as well as a flexible inflation target rule. I study two models. The first model is a representative agent economy. The second model is an artificial economy with two types of individuals: capital owners and workers. Capital owners can accumulate assets without restrictions. Workers can only spend their wages and do not have access to financial instruments. The rules have similar performances in the single agent artificial economy. Flexible inflation target is the dominant monetary arrangement for capital owners in my model with two types of households. Labor supply elasticity is crucial to decide which rule is welfare superior for workers.