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UBC Theses and Dissertations

Essays on new open economy macroeconomics Shi, Kang

Abstract

This thesis consists of three essays on the issues related to endogenous currency of pricing in utility-based open economy models. The first essay endogenizes both the currency of liability denomination and the currency of export pricing to study twin dollarization in East Asian economies, a phenomenon where firms borrow in US dollars and also set export prices in US dollars. This essay shows that twin dollarization is an optional strategy for all firms when exchange rate flexibility is limited, and it can reduce the welfare loss caused by a fixed exchange rate regime. The second essay examines the role of US dollar as an oil currency and its impact on the world dollar standard and the global economy in a two-country general equilibrium model with sticky prices. When the oil price is denominated in US dollars, US firms bear less exchange rate risk than foreign firms when facing oil price shocks. As a result of this asymmetry, all the firms have an incentive to set export prices in dollars, this will generate an endogenously determined dollar standard in international goods pricing. In such a case, the households in the US are better off than those in the rest of the world in term of welfare, though it is costly for the US to have a dollar standard. The third essay re-examines the issue of the degree of exchange rate flexibility in an open economy monetary policy game. It focuses on an environment where the currency of pricing is endogenous, and monetary authorities take into account the way in which firms make this choice. It is shown that there is a unique equilibrium to the monetary policy game, where all firms follow PCP, and Friedman’s classic defense [i.e. Friedman’s classic defence] of flexible exchange rates is upheld. Meanwhile, an alternative method to sustain flexible exchange rates is also provided.

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