Essays in International Macroeconomics

This dissertation consists of two essays in international macroeconomics. Thefirst essay shows that optimal fiscal and monetary policy is time consistent in astandard small open economy. Further, there exist many maturity structuresof public debt capable of rendering the optimal policy time consistent. Thisresult is in sharp contrast with that obtained in the context of closed-economymodels. In the closed economy, the time consistency of optimal monetary andfiscal policy imposes severe restrictions on public debt in the form of a uniqueterm structure of public debt that governments can leave to their successorsat each point in time. The time consistent result is robust: optimal policy istime consistent when both real and nominal bonds have finite horizons. Whilein a closed economy, governments must have both nominal and real bonds,and have at least real bonds over an infinite horizon to render optimal policytime consistent.The second essay uses a dynamic stochastic general equilibrium model totheoretically rationalize the empirical finding that sudden stops have weakereffects on outputs when the small open economy is more open to trade. First,welfare costs of sudden stops are decreasing in trade openness. The reasonis that when the economy is more open to trade, the economy will have lessvolatile capital, which leads to less volatile output. In terms of welfare, whenthe small open economy is more open to trade, the welfare costs of suddenstops will be smaller. Second, sudden stops may be welfare improving to thesmall open economy. This is because when the representative household isa net borrower in the international capital market, its consumption will benegatively correlated with country spread. Since utility is a concave functionof consumption, it must be a convex function of country spread. That is, whenthe country spread is more volatile, the mean utility is higher. The two findingsare robust: they hold with one sector economy model, and two sector economymodels with homogenous capital and heterogenous capital. In addition, thispaper shows that a counter-cyclical tariff rate policy is not welfare-improving.