Three essays on the interconnection between the external sector and domestic macroeconomic performance

Resumen

The thesis analyses the interaction between the external sector and domestic macroeconomic performance through theoretical and empirical analysis. This interaction is highly relevant since it affects macroeconomic outcomes and the effectivity of economic policy to promote strong and stable economies. The thesis includes three main chapters: the first one studies current-account stability spells and the determinants of current-account breaks; the second one examines the interaction between current-account imbalances, exchange rates and domestic and global output gaps; and the third one analyzes how international developments may have modified the Phillips curve, in particular through the impact of foreign competition. Regarding the analysis in the first chapter, it focuses on the identification of structural breaks in the current account and on the study of their characteristics and determinants. It also includes an analysis of the periods between breaks, an original concept labeled current-account stability spells. The application of the Lee and Strazicich (2003) unit root test on a sample of 181 economies between 1980-2018 allows to identify 212 breaks and 341 stability spells. These stability spells are more volatile and shorter the further the current account is from its equilibrium, and half of them last less than a decade. Estimations also show that promoting growth and accumulating foreign reserves are particularly useful to prevent breaks, while lower per capita income increases exposure to break risks. Finally, results indicate that active policy measures to induce breaks could help to address unsustainable current-account imbalances. The second chapter analyzes the relationship between internal, external and global imbalances by examining how the current account, real effective exchange-rate (REER) misalignments and domestic and foreign output gaps interact. The chapter opens with an original approach to classic theories on the balance of payments, which reinforces the theoretical basis of the relationship between these variables and facilitates the subsequent estimations. The theory is tested through PVAR estimations on a sample of 18 advanced economies between 1986-2017. Results show that current accounts and output gaps present an inverse relationship with bilateral causality links. Variations in the output gap have a particularly relevant impact on current-account figures, while policies that increase these current-account figures could boost conjunctural and structural growth. Additionally, REER imbalances cause an opposite effect on the current account and growth in relation to its potential. Finally, higher growth results in real exchange-rate appreciation, which supports the Balassa-Samuelson hypothesis. The third chapter starts with a micro-founded theoretical development of an open economy Phillips curve (OEPC), in which external competition significantly impacts inflation through two channels: a) the gap between the current and potential growth of imports, and b) real exchange-rate misalignments. Next, the OEPC is estimated through panel regressions and PVAR accompanied by impulse/response analysis on a sample of 15 advanced economies for 1994-2017. Results endorse the validity of the theoretical relationship and suggest that international competition reduces the pricing power of domestic firms, thus curbing inflationary pressures. They also indicate that the slope of the OEPC has significantly declined in the years since the Great Recession.