Essays on the macroeconomic impact of trade and monetary policy

• Main Author: Lisicky, Milan
• Published: London School of Economics and Political Science (University of London) 2012
• Subjects: 339.5; JZ International relations
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.571093

My thesis consists of three chapters. The aim of the first two chapters is to investigate the linkages between trade and the cross-country comovement and volatility of GDP growth, while the last chapter is an independent study on how the optimal design of monetary policy depends on the share of labour- and capital-intensive sectors. The first chapter develops a framework to study the effects of international trade on GDP comovement. Using a standard trade-theoretical approach, I first show how the comovement between any pair of countries is linked to shocks affecting both the two countries bilaterally and all other countries. Secondly, I use a calibrated version of the model to assess the importance of the bilateral channel relative to the role of linkages with all other countries. The second chapter investigates whether and how openness to trade may affect macroeconomic volatility. While greater openness provides a powerful channel for transmission of foreign disturbances, it also lowers the exposure to domestic shocks. My co-authors and I show that as long as the volatility of trading partners and covariance of shocks across countries are not too large, trade can act as a channel for the diversification of country-specific shocks and in that way contribute to lower volatility. The third chapter examines what is the optimal measure of inflation in a two-sector economy with nominal frictions, where sectors differ in labour intensity. I find that a welfare-oriented central bank should follow more closely the developments in the less labour-intensive sector. The source of this bias is traced back to a greater sensitivity of the marginal product of labour in that sector, so that output dispersion caused by nominal rigidities generates higher efficiency losses where labour is relatively less abundant.