Abstract Essays on Small Open Economy Models

This thesis focuses on the financial imperfections, consumption and the trade balance in small open economies. Chapter 1 investigates the cause for the low-er consumption-output correlation in the nontradable sector. This chapter con-firms the existence of financial frictions in the international markets by show-ing: first, the consumption-output correlations in the tradable and nontradable sectors becomes identical in autarky; second, the difference in the correlations is reversed under a free trade economy. Chapter 2 answers the question of why consumption is more volatile than output in developing countries while it is less volatile than output in developed economies. This paper shows that the relatively large home sector in develop-ing economies contributes to this difference, and the driving force for this differ-ence is technology. Thus this paper suggests that volatile market consumption is almost inevitable at the start of industrialization, when the technology level in the market sector is just above that of the home sector. Chapter 3 exploreswhy the trade balance ismore sensitive to output change