Empirical essays on macroeconomic policies in open economies

This dissertation which consists of three empirical essays attempts to investigate the effects of macroeconomic policy on macroeconomic performance such as exchange rates, inflation and economic growth. Chapter II analyzes the perverse effect of budget deficits on the real exchange rate by incorporating risk factors such as default risk and the risk of monetization and by decomposing the deficits. With panel data for 17 Organizations for Economic Cooperation and Development (OECD) countries between 1977 and 1994, this chapter finds that the risk factors partially account for the perverse effect. When the deficit is decomposed, some elements have the conventional effect while others have the perverse effect.; Chapter III explores the revenue motive as one of the main determinants of inflation bias instead of the employment motive. The existing literature exclusively focuses on the amount of government budget that needs financing measured by variables such as government spending and the stock of debt. However, this chapter considers new fiscal variables including financial depth and external debt service that measure a government's ability to finance the budget at home and abroad. With cross-section data for more than 100 developed and developing countries between 1973 and 1993, this chapter presents that new fiscal variables play an important role in explaining the differences in inflation across countries. New fiscal variables weaken the importance of existing employment motive variables such as central bank independence, political instability and openness. Finance means consideration could also solve the openness-inflation puzzle.; Chapter IV examines the effect of monetary discretion on macroeconomic performance by focusing on the long debated rule-based versus discretion-based monetary policy. The existing empirical studies which use central bank independence and exchange rate regimes as a degree of discretion find that a theoretical tradeoff does not exist between inflation and output stability. With a data set of more than 90 developed and developing countries between 1970 and 1994, this chapter supports the existing empirical results while expanding the degree of monetary discretion to a more comprehensive measure. Monetary discretion is characterized by nine different monetary frameworks: foreign currency, currency union, currency board, three other pegged exchange rate regimes, inflation targeting, monetary targeting and full discretion.