Essays in International Macroeconomics

This work studies the impact of foreign shocks on advanced and emerging small-open economies, along different dimensions. Chapter 1 studies pass-through of exchange rates to prices in small-open commodity-exporter economies, taking Canada as a case study. We estimate pass-through on a wide cross-section of disaggregated import, producer, and consumer prices, conditional on commodity shocks that explain a major share of the volatility in price and exchange rate series. Our pass-through measure is free from endogeneity concerns between prices and exchange rates and leads, in some cases, to opposite inference about the sign of pass-through with respect to standard estimates. By focusing on industry-level producer price indexes, we show that conditional pass-through decreases with industry market power, while it increases in the degree of import penetration and persistence of industry-specific shocks. In Chapter 2, we estimate the response of domestic inflation to a US interest rate shock in a sample of 24 emerging economies, using local projection methods. Our results point out that the sign of the inflation response crucially depends on the monetary policy framework: after a US monetary policy tightening, inflation decreases in peggers; inflation increases in floaters that do not target inflation; the inflation response is not statistically different from zero in floaters that are committed to an inflation target. We rationalize this outcome using a standard DSGE model. We show that targeting inflation yields larger welfare gains compared to the other two monetary policy frameworks, even assuming dominant currency pricing. Chapter 3 analyses the impact of global risk aversion on the cost of borrowing for emerging market economies. In a sample of five emerging markets, we show that in response to risk aversion shocks: spreads rise, at all maturities; borrowing long term becomes cheaper. Hence, risk aversion shocks increase the cost of borrowing, but they make borrowing long term more convenient. Our results can be rationalized by considering that passing from periods of low to high risk aversion, the risk-reward trade-off (Sharpe ratio) changes in favour of longer maturities. As a consequence, holding long term bonds becomes more convenient for investors and, thus, issuing long term debt is cheaper for emerging markets. Our results are robust to different specifications of the global risk aversion time series, and to measures of country-specific investor risk aversion.