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.

This dissertation comprises of three essays in international macroeconomics. The first essay investigates the competition between two city states, both of which will stand in place of countries in the global scheme. Under the framework of the three-stages-game, we assume that there are two cities competing for dominance over two sectors: the manufacturing sector and the nancial sector. In addition, the government of each city state can build infrastructure to increase the competitiveness of the financial and distributive firms of its city. Under this framework, we are able to show that the amount of resources, the start-up costs of providing services, and the relative e ectiveness of their infrastructures determine the optimal amounts of infrastructures the cities decide to build, and thus also decide the equilibrium outcome of this game. In my second essay, we examine the relationship between income distribution and import patterns. The Linder hypothesis states that countries with similar economic characteristics should trade more often. However, although the total volumes of trade between these countries are similar, the traded goods may be different. This paper investigates the trading patterns of countries with similar characteristics. Specifically, we analyze the relationship between the import patterns and income distributions of importers. We develop an import similarity index to portray the composition of imports and utilize the idea of a "market overlap," a theoretical concept proposed by Bohman and Nilsson (2007), to represent the similarity of income distributions across different importing countries. We provide empirical evidence to support the notion that countries with similar income distributions display similar import patterns. We also separate countries by income level and find that income distribution exerts a positive impact on the similarity of import patterns for all but low income countries. Finally, we incorporate the characteristics of goods into our analysis and show that the positive relationship between income distributions and import patterns holds for differentiated and reference-priced goods, but not for homogeneous goods. In my final essay, we look into another aspect of international literature: the exchange rate. In the literature, we find that vector autoregressive (VAR) models and impulse response analyses are common tools to study the relationship between monetary policy and exchange rate movements. Therefore, it is important to investigate the accuracy of the VAR model. In the first part of this essay, we assume that the true, underlying, data-generating process is hump-shaped, which is the shape of the impulse response of exchange rate to a monetary policy shock. We show that results estimated from any VAR models applying AIC as their lags selection are biased. We also introduce two possible solutions to remedy this bias: the use of more lags in the VAR models or the use of the proposed loss functions estimations. These results suggest we should be cautious when interpreting empirical evidences on international literature. In the second part of the same essay, we investigate another issue that is closely related to the exchange rate and the VAR model. Under the estimation of the VAR model, the researcher implicitly assumes that the objective loss function is quadratic. However, it is a well accepted fact that monetary authority adjusts the interest rate according to policy. One of the objectives of the monetary authority is to influence the exchange rate in their favor. They estimate the size of the loss caused by deviations from the current exchange rate to the rate they desire, and then they adjust the amount of money in the international market. We propose an asymmetric loss function that monetary authorities may use to estimate the impulse response of the exchange rate to a contractionary monetary policy shock. We then compare these estimated impulse response functions to those estimated by the VAR. We find that while both of these estimated impulse response functions share the same sign, the magnitude and the duration of the shock are quite different. These results suggest that the VAR model may not be appropriate in estimating the exchange rate movement.

This dissertation presents three essays on international macroeconomics. The first article is a literature review of three separate, and often disconnected, strands of the economic literature that has addressed pairs of linkages between foreign indebtedness, economic growth, and macroeconomic volatility during the last three decades. The article surveys the main findings of the theoretical and the empirical literature, with an emphasis on findings relevant to macroeconomic policymakers. We find that endogeneity and nonlinearity are the central econometric in estimating each of the bivariate relationships due primarily to institutionally related, debt overhang, and credit rationing problems. Motivated by these findings, we propuse a parsimonious empirical model, called the "debt-growth-volatility nexus" , which unites these strands of inquiry. The second article uses a GVAR approach to address the endogeneity issue in the relations among public debt, economic growth and macroeconomic volatility. Based on a sample of 81 developed and developing countries over the 1970-2011 period, we find strong evidence supporting bidirectional links between debt and growth, debt and volatility, and growth and volatility. Our setup of country groups indicates that negative and positive effects can coexist in the world economy. The third article addresses the nonlinearity issue using a disequilibrium approach. We disentangle the credit rationing effect from the nonlinear relation between debt and growth commonly known as debt overhang. Using a sample of 28 developing countries over the period from 1970 to 2010, we estimate a switching model with unknown sample separation and a set of proxies for credit rationing that we next introduce into a growth model. Our estimates indicate that credit rationing can explain the negative effect of high debt levels on growth rates.