Essays on monetary policy in open economies

This dissertation studies whether monetary policy has short run effects on output in emerging economies and characterizes the mechanisms of transmission of the monetary policy. Specifically it focuses on the real effects of the monetary policy in Brazil, where policymakers introduced structural reforms earlier than other emerging economies. Chapter I identifies the effects of monetary policy in Brazil using a vector autoregressive model. It finds that monetary policy has short run effects on output and nearly none on prices. This contrasts with the policy wisdom that monetary policy in EMEs can only affect prices. Chapter II, studies the interest rate channel of monetary policy in Brazil. It finds that surprise changes in the monetary policy interest rates have larger effects on the market interest rate during expansions than in recessions. This is attributed to the larger expected duration of expansion over recesions. Chapter III, uses a Dynamic Stochastic General Equilibrium model to study the effects of monetary policy when firms borrow to finance their working capital in an open economy. This issue is crucial in cases like Brazil where working capital credit explains half of the firms' borrowing and it quadrupled in the last 15 years. A monetary policy tightening has two effects: i) It discourages consumption (the traditional demand channel) and ii) It increases the production cost (known as the working capital channel). The final effect on inflation is unclear as these effects work in opposite directions. The model concludes that in an open economy where there is working capital borrowing, the aggregate demand channel dominates the working capital channel. This is due to the strong response of consumption to the exchange rate.