Macroeconomics of small open economies

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This thesis explores applied macroeconomics, focusing on open-economy macroeconomic literature that utilizes quantitative models to analyze the transmission of economic disturbances and international policy. It examines the development of these models, their data-matching capabilities, and their application in policy analysis, particularly regarding exchange rate stabilization and monetary policy arrangements. Chapter 2 compares Taylor-type interest rules with varying reaction coefficients to the real exchange rate, revealing that a moderate approach to real exchange rate targeting within the original Taylor rule enhances welfare in response to productivity and foreign demand shocks, while reducing welfare concerning government consumption and terms of trade shocks. Notably, outcomes remain robust under rules allowing for significant interest smoothing. In Chapter 3, I replicate Jordi Gali’s VAR analysis on technology shocks and employment in G7 countries, introducing an open-economy block to the endogenous variables and employing structural vector error correction methods for a less restrictive analysis. The findings largely align with Gali’s results, indicating a negative and persistent response of employment to positive technology shocks.