Three essays on monetary and international economics
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This thesis comprises three essays on monetary and international economics. The ﬁrst essay studies two issues of countries’ exchange rate regime (ERR) choices: why countries peg and, if they peg, how they choose their anchor currency. Using spatial analysis, I found that countries are likely to follow the ERR of “neighbouring” countries, and countries’ ERR are jointly determined by network effects and country-speciﬁc factors. The ﬁndings indicate that countries may achieve higher welfare by jointly choosing their ERRs with their major partners through cooperation and negotiation. In the second essay, I am trying to answer the question why countries target the particular variables they target by studying the determinants of countries’ monetary policy regimes (MPRs). The study focuses on original OECD member countries, and I develop a chronology of countries’ de jure MPRs for early OECD member countries for the post-Bretton Woods period. I also study the determinants of countries’ monetary policy arrangements based on de facto analysis with Cobham’s (2015) classiﬁcation as the cross-reference. The results suggest that economic size, trade openness, ﬁnancial development and political environment all have a role in determining the MPR. The third essay studies two main by-products of ﬁnancial integration: contagion and risk sharing. I set up a Huggett (1993) type heterogeneous agent model with different types of countries, and try to ﬁll the gap in the literature by exploring the impact of ﬁnancial integration on consumers with different wealth status. The main ﬁndings indicate that lenders and borrowers in countries with current account surpluses and deﬁcits respond to the ﬁnancial crisis asymmetrically. Moreover, the relationship between ﬁnancial integration and consumption smoothing is not monotonic, indicating that there is a trade-off between the beneﬁts of international risk sharing and the costs of ﬁnancial contagion induced by unexpected negative shocks as observed in recent history.