Four essays in macroeconomic modeling of exchange rates, interest rates and commodity prices

This thesis consists of four chapters that examine different policy relevant economic processes related to exchange rates, interest rates and commodity prices. In the first chapter we empirically analyze the relationship between carry trade positions and some key financial as well as macroeconomic variables using a multivariate threshold model. It is often stated that the Swiss franc serves as a funding currency. Therefore, we focus on carry trades based on the currency pairs US dollar/Swiss franc and euro/Swiss franc. Generalized impulse responses differ in magnitude and significance between periods with a large and small interest-rate differential. Furthermore, in periods with a small interest-rate differential, carry trade activities Granger-cause the nominal exchange rate. The Granger causality test results further indicate feedback trading. Overall, carry trade positions are driven to a large extent by the expected risk in financial markets and the nominal exchange rate. Liquidity constraints can also be important, whereas the carry itself plays only a minor role. The second chapter evaluates the importance of commodity price shocks in the U.S. business cycle. Therefore, we extend the standard set of identified shocks to include unexpected changes in commodity prices. The resulting SVAR shows that commodity price shocks are a very important driving force of macroeconomic fluctuations (second only to investment-specific technology shocks), particularly with respect to inflation. In addition, we find that the systematic contractionary monetary policy feedback rule to sudden increases in commodity prices helped the Fed to achieve price stability in the long run, yet at the cost of a significant economic downturn in output and per-capita hours. The third chapter explores the robustness of the Balassa-Samuelson (BS) hypothesis. We analyze a panel of OECD countries from 1970 to 2008 and compare three different data sets on sectoral productivity, including a newly constructed database on total factor productivity. Overall, our DOLS estimation results do not support the BS hypothesis. For the last two decades, we find a very robust negative equilibrium relationship between the productivity in the tradable sector and the real exchange rate, in contrast to BS. Earlier supportive findings depend strongly on the choice of the data set. Except for the terms of trade, the explanatory power of other variables is weak. In the fourth chapter we sketch a model that shows how skill-biased technological change may reverse the classic Balassa-Samuelson effect, leading to a negative relationship between the productivity in the tradable sector and the real exchange rate. In a small open economy, export goods are produced with capital, high-skilled and low-skilled labor, and traded for imported consumption goods. Non-tradable services are produced with low-skilled labor only. A rise in the productivity of capital has two effects: (1) It may reduce the demand for labor in the tradable sector if the substitutability of low-skilled labor and capital in the tradable sector is high; and (2) it increases the demand for non-tradables and its labor input. Overall demand for low-skilled labor declines if the labor force of the tradable sector is large relative to the labor force of the non-tradable sector. This leads to lower wages and thus to lower prices and a real exchange rate depreciation.