Essays in open economy macroeconomics

Abstract

This thesis is a collection of two essays on open economy macroeconomics. The first essay is on imperfect asset substitutability and current account dynamics. It is divided into four chapters. The first chapter in this essay is a preface for the chapters to follow. The second chapter lays out a model of the current account in which assets are perfectly substitutable, and investigates the nature of wealth dynamics in the presence of exogenous shocks. The third chapter extends the model of the second chapter to the case where assets are imperfectly substitutable and once again investigates the model's response to exogenous shocks. In particular, the differences that arise from valuation effects, which were absent in the perfect substitutability case, are highlighted. The fourth chapter applies the model of the third chapter to the question of what lies behind the U.S. current account deficit and dollar appreciation for the period 1996-2004. I show that a reasonable explanation of these phenomena should include a key role for shocks to foreigners' portfolio preferences.

(cont.) The second essay is contained in a single chapter, and is an empirical investigation of the linkages between FDI and trade openness for a panel of developing countries over the period 1970-97. Instrumenting for both trade openness and FDI stocks, I show that the correlation commonly observed in the data between FDI and trade openness, is quite possibly due to causality running from FDI to trade openness rather than from trade openness to FDI.