Three essays in macroeconomics and international economics

This dissertation examines two issues in international economics and macroeconomics. The first is to understand the response of productivity to major real exchange rate appreciations and the second concerns how to compare the fits of different calibrated macroeconomic models. In the first chapter, I construct a model to clarify how the increased competition due to an exchange rate appreciation provides incentive for firms to improve productivity. However, if a firm is in an industry shielded by a high trade cost, then the incentive is weaker. In industries with fewer firms, profits are more responsive to productivity improvements, therefore, firms are more likely to invest more heavily in productivity improvement. Empirical analysis of Canadian manufacturing data from 1997 to 2006 finds evidence consistent with the model predictions. The second chapter presents testing procedures for comparison of misspecified calibrated models. The proposed tests are of the Vuong-type (Vuong, 1989; Rivers and Vuong, 2002). In the framework here, an econometrician selects values for the parameters in order to match some characteristics of the data with those implied by the theoretical model. We assume that all competing models are misspecified, and suggest a test for the null hypothesis that all considered models provide equal fit to the data characteristics, against the alternative that one of the models is a better approximation. The Carlstrom and Fuerst (1997) model and the Bernanke, Gertler and Gilchrist (1999) model are two leading models that study financial frictions in macroeconomic models. In particular, these models show that due to financial frictions, net worth plays an important role in obtaining external finance, and that at an aggregate level, net worth can propagate technology shocks and monetary shocks. However, neither paper examines whether the models can reproduce cyclical properties of net worth. The third chapter addresses this issue by applying the comparison method developed in the third chapter. Results indicate both models do reasonably well. In addition, price rigidity seems to play an important role in the latter model. However, both models can only partially capture the positive correlation between risk premium and net worth.Arts, Faculty ofVancouver School of EconomicsGraduat