Essays in international macroeconomics and monetary economics

The first chapter examines the predicting power of real money balance. Recent empirical studies including Friedman and Kuttner (1992) find that nominal M2 no longer has a significant predicting power for real GDP after 1980s. Yield spread of interest rates, on the other hand is shown to have better predicting power than nominal M2. However, monetary theory actually provides a rationale for using real money balance instead of nominal money balance in the VAR model. When we use real M2 and avoid the pitfalls of the econometric issues in earlier papers, we find that real M2 has significant predicting power for real GDP. The performance of real M2 is much better than yield spread in predicting real GDP.; The second chapter investigates the importance of world common shocks in driving international economic fluctuations. A novel dynamic factor model is employed to analyze the dynamics of real GDP, consumption and investment for 103 countries. World common shocks are found to explain a substantial amount of international economic fluctuations, contrary to previous findings with only one common shock. For real GDP, rich countries are less susceptible to world common shocks. For consumption, rich, large countries are less sensitive to world common shocks. Moreover, the sensitivity of a country's investment to world common shocks depends on the country's size, openness and remoteness. Oil price shock is identified as one of the world common shocks. Our results support theoretical economic models with multiple shocks and richer dynamic structures.; The third chapter investigates empirically the effect of financial liberalization on international risk sharing. Limited international risk sharing has been attributed in part to incomplete financial markets. Over the past twenty years, many countries have chosen to liberalize their financial markets. This chapter investigates empirically whether there is improvement in international risk sharing after financial liberalization. The result shows that the effect of financial liberalization on international risk sharing is not significant. On the other hand, good markets might be acting as a substitute for financial markets in sharing risk internationally.