Essays on Macroeconomics Policies and Stabilization

Chapter 1: This study investigates the role of financial market imperfections in explaining procyclical macroeconomic policies and capital flows in emerging market economies. It is shown that as the risk premium faced in international capital markets becomes more sensitive to changes in country's real net worth, the policymaker places more weight on the real exchange rate stabilization goal. In the face of a negative shock, this may require the policymaker to defend the domestic currency with high interest rates which points to a procyclical monetary policy stance. The resulting recession leads to a decrease in the country's real net worth causing the risk premium to increase. This is followed by a capital outflow. It is also shown that as foreign debt becomes more expensive, the government finds it optimal to discipline the fiscal policy and run a primary surplus, which implies a procyclical fiscal policy response.

Note: Abstract extracted from PDF text