Essays in Macroeconomics

Abstract

This dissertation will address the dynamic interrelationship between multiple macro-economic fundamentals. The second chapter details a solution to the excess volatility puzzle described in the macro-economic labor literature in which properly calibrated search and matching models are unable to accurately match both the volatility of vacancies and productivity. The model described utilizes agents who abstract from rational expectations via knightian uncertainty in order to break the tight mechanism that links both productivity and vacancies together. The third chapter documents previously unknown long and short run dynamic interrelationships between the real exchange rate and various macro-economic fundamentals. It refutes the Backus-Smith model's assertion that relative consumption growth and the real exchange rate should be tightly correlated and documents a novel relationship between relative investment and output growth. More specifically, it notes that higher relative investment today should signal future appreciations of the exchange rate. The fourth chapter takes the novel result from the third chapter and proposes a model in order to define a mechanism which may explain the interesting interrelationship between investment and the real exchange rate at medium and long horizons. In particular, the model utilizes bonds as a form of collateral in the production of the investment good in order to more tightly link the two fundamentals.