Three essays on international economics

Abstract

In this dissertation, I offer three essays on international economics with particular concentration on the question of optimal technology sharing along with the adoption of labor replacing technology, the international business cycle model to establish a negative correlation between the relative consumption and real exchange rate and optimal exchange rate regime under the condition of currency mismatch. The first one is the study on the determination of the optimal amount of exclusive technology sharing between the technologically advanced country and her competitor, while the latter one develops a two-country model to solve the famous Backus-Smith puzzle for the elasticity of substitution in line with trade literature for a fairly persistent productivity shock. The final chapter investigates the welfare implications of currency mismatch in a small open economy with a segmented asset market if it receives a monetary shock.

In "A Two-Country Model of Technology Sharing," I investigate the optimal level of technology sharing by developing a two-country model where automated technologies replace human labor. I assume that the two countries are symmetric in all aspects except the technology possession, which is the driving force of trade between these countries. The paper investigates what happens to the gains from trade when a technologically advanced country shares exclusive technology with its opponent. From the static setup of the model, it is obvious that both countries will gain from trade when the technology leader provides logistic support to the follower. In the case of sharing less productive exclusive technology with the follower, the optimal level of sharing decides the technology cutoff, which separates the range of goods produced with automated technology rather than manual. On the other hand, the technology leader must determine the technology cutoff at first if she decides to share her most productive exclusive technology, which dictates the optimal level of sharing.

In "The Role of Investment Composition to Solve the Backus-Smith Puzzle," we develop an international business cycle model with a more realistic composition of investment goods. We build a model to establish a negative correlation between the relative consumption and real exchange rate by augmenting with an internationally incomplete asset market and distribution services to carry out traded goods to the consumers. Standard models in the literature solve this puzzle for low trade elasticity of substitution between goods, while the higher values of trade elasticities are complemented by highly persistent productivity shock. Our multi-sectoral investment composition model takes care of this Backus-Smith anomaly for higher values of trade elasticities without perturbing the persistence of productivity shock.

In "Optimal Exchange Rate Regimes: Segmented Asset Markets with Currency Mismatch," we investigate the welfare implications of currency mismatch in a small open economy where the asset market is segmented within a stochastic dynamic general equilibrium network. The question of optimal exchange rate regime is analyzed where only a fraction of households have access to the international credit market, which is the key channel to asset market segmentation. Fixed exchange rates are found to be the optimal policy in this environment as they insulate the currency risk and insure households against the consumption variability, while flexible exchange rates exhibit volatilities in the consumption of heterogeneous households.