Essays in Open Economy Macroeconomics

This thesis addresses three issues in international macroeconomics. Chapter 2 provides an empirical investigation of both the shortand long-term determinants of current accounts for eight largest emerging Asian economies. The analysis is carried out within a cointegrated VAR framework. In this chapter, I show that current account behaviours in emerging Asian economies are heterogeneous. Initial stock of net foreign assets and degree of openness to international trade are important factors in explaining the long-run behaviour of current accounts. Moreover, the current accounts of all sample economies have a self-adjusting mechanism except China. Short-run current account adjustment towards long-run equilibrium path is gradual, with the disequilibrium term being the main determinant of the short-run current account variations. Chapter 3 analyzes current account sustainability for each of the sample economies included in chapter 2 in the context of the intertemporal budget constraint approach. Both strong and weak form tests of current account sustainability are performed in the study. Based on more generalized sustainability conditions, all the sample economies are found to be on a sustainable current account path. In addition, I find that accounting for endogenously identified structural breaks increases the instances of cointegration between an economy’s exports and imports, which are more in favour of current account sustainability. Chapter 4 uses a three-country general equilibrium model to investigate the importance of consumption bias in generating equity portfolio bias. I find that the optimal holdings of non­ traded goods equities are only affected by the separability between traded and non-traded goods, while the optimal holdings of traded goods equities are determined by the household’s preferences over domestic and foreign traded goods. In addition, the calibration results suggest that, within a three-country framework, the optimal holdings of the two foreign traded goods equities depend on the amount of the domestic traded goods each foreign country consumes. The sensitivity analysis suggests that the results of the three-country model are very robust in the presence of plausible and large variation in the parameters values.