Monetary Policy, Trade Dynamics, and Labor Markets in Open Economies

University dissertation from Uppsala : Department of Economics

Abstract: This thesis consists of four self-contained essays.Essay 1 studies the implications of relaxing the assumption that the elasticity of international substitution is constant over time horizons, through the modeling of habit formation. Compared to the standard model without habits, the proposed dynamic demand model exhibits substantially more volatile exchange rates and it can generate higher real exchange rate persistence in the presence of interest-rate smoothing. Moreover, welfare-maximizing monetary policy results in even stronger exchange rate responses to shocks than does the classical Taylor rule.Essay 2 evaluates the effects of changes in the replacement rate of unemployment benefits on wages and unemployment in an estimated DSGE model. Allowing for permanent shocks to the replacement rate, we find a semielasticity of unemployment of 1.22. Our rich model of the wage bargain further allows us to determine the relative importance of match separation and strike/lockout in wage bargaining. Results from our main specification indicate that breakdowns are more important threat points than conflicts in negotiations when wages are determined.Essay 3 examines the econometric methodology of the empirical literature on the elasticity of international substitution following Feenstra (1994), looking in more detail at the effect on the results of the non-linear mapping between reduced-form and structural parameters. Our main contribution is the use of bootstrap methods, which can explain why researchers applying the Feenstra method may tend to find high estimates. The bootstrap further allows us to better characterize the accuracy of the obtained estimates, a point vastly overlooked by the literature.In Essay 4 we estimate the elasticity of substitution of a country's imports, and that of its exports on the world market, for EU countries using sector level trade data. We present a new empirical strategy based on the identification scheme by Feenstra (1994), which enables the estimation of elasticities from data on exports. We obtain aggregate elasticities for the EU27 countries, with a mean of 3.5 for imports and 4.0 for exports, bringing us closer to traditional estimates and bridging the gap between the newer micro data estimates and the more traditional estimates found in the macroeconomic literature.

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