Essays on imperfect financial integration and partial dollarization in open economies

In this dissertation I study two important issues in international macroeconomics. The first one is related with the role played of incomplete and imperfect financial integration in explaining the apparent lack of risk sharing across countries. The second topic evaluates the difficulties that Central Banks face in stabilizing inflation and output in a small open economy with partial dollarization.; In the first chapter, which is joint with Jorge Selaive, we evaluate the role of incomplete markets and imperfect financial integration in explaining the lack of risk sharing across countries. We assess the importance of international financial frictions in this issue by constructing an incomplete market model with stationary net foreign assets (NFA) and imperfect pass-through (IPT). On theoretical grounds, our results suggest that the dynamics of NFA may account for the lack of risk-sharing across countries. In addition, the IPT mechanism, by closing the current account channel, does not help to explain this feature of the data.; In the second chapter, which is also joint with Jorge Selaive, we analyze the empirical implications of imperfect financial integration on the risk-sharing condition and on uncovered interest rate parity (UIP). First, we find strong evidence for OECD countries that the NFA positions contribute to explain the lack of risk-sharing across countries. Similarly, in terms of the UIP, the NFA position is able to capture a time-varying risk-premium for a small group of countries at short-term horizons.; Finally in the third chapter, joint with Guillermo Felices, we analyze the difficulties of central banks to endogenously stabilize inflation and output in a partially dollarized economy. Our findings suggest that the higher the degree of dollarization the more ineffective the central bank is to stabilize output and inflation, regardless the shock that hits the economy. We also show that, under a standard loss function, it is optimal for a central bank to react, in addition to anticipated inflation, to the foreign interest rate.