We develop a tractable open-economy new-Keynesian model with two sectors to analyze the short-term effects of aid-financed fiscal expansions. We distinguish between spending the aid, which is under the control of the fiscal authorities, and absorbing the aid-using the aid to finance a higher current account deficit-which is influenced by the central bank's reserves policy when access to international capital markets is limited. The standard treatment of the transfer problem implicitly assumes spending equals absorption. Here, in contrast, a policy mix that results in spending but not absorbing the aid generates demand pressures and results in an increase in real interest rates. It can also lead to a temporary real depreciation if demand pressures are strong enough to threaten external balance. Certain features of low income countries, such as limited participation in domestic financial markets, make a real depreciation more likely by amplifying demand pressures when aid is spent but not absorbed. The results from our model can help understand the recent experience of Uganda, which saw an increase in government spending following a surge in aid yet experienced a real depreciation and an increase in real interest rates.

Nearly all countries in the Middle East and Central Asia have pledged to contain greenhouse gas emissions as part of the Paris Agreement. The purpose of this paper is to identify the menu of fiscal policy options which would allow the region to fulfil its missions reduction commitment. Specifically, the paper examines and estimates the tradeoff between two broad categories of fiscal policies: public investments in renewable sources of energy and measures that raise the effective price of fossil fuels. Such a dichotomy captures the key medium-term macroeconomic and long-term intergenerational trade-offs that are arguably the most pertinent for the countries in the Middle East and Central Asia where governments are likely to play a leading role in the low-carbon transition. At one end of this tradeoff, a gradual removal of all fuel subsidies and, in addition, a phased introduction of a carbon tax of $8 per metric-ton of CO2-equivalent in the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) and $4 in the Caucasus and Central Asia (CCA) over the next eight years could achieve the region’s 2030 emissions abatement goals without additional investments in renewables. T Alternatively, additional combined public investments of close to US$900 billion in renewable sources of energy between 2023 and 2030 would allow achieving the region’s emissions reduction targets with fuel subsidies reduced by two thirds and without any carbon tax. In practice, most countries are likely to choose a mix of these policies based on their individual circumstances. Importantly, the deployment of non-fiscal mitigation policies—such as tightening of environmental regulations, such as raising emissions standards, or incentivizing green private investments—could play an important role in reducing the required fiscal effort and improving the tradeoff described above. Global and regional initiatives to provide affordable financial support and technological assistance would be equally important in improving the region’s economic options. Regardless of the chosen strategy, delaying the rollout of mitigation policies would make achieving the emissions reduction targets more difficult and costly. Therefore, an early start will be essential to tread a smoother path toward a low-carbon future in the Middle East and Central Asia.

Abstract: This dissertation is comprised of three essays in monetary and international macroeconomics. The first essay, titled "A Dynamic Model of Exogenous Exchange Rate Pass-Through", examines a two-country open economy model with sticky prices where exporters' choice of invoicing currency is endogenous. Besides generating incomplete pass-through, the model yields three main results. First, firms' invoicing strategy is generally time-varying. Second, average pass-through is asymmetric in times of persistent depreciation and appreciation. Finally, cross-country differences in money supply variability produce an origin-based asymmetry: different average pass-through rates into import and export prices. The second essay, titled "Limited Commitment, Inaction and Optimal Monetary Policy", examines the optimal frequency of monetary policy meetings when their schedule is pre-announced. The contribution of this paper is twofold. First, we show that in the standard New Keynesian framework infrequent but periodic revision of monetary policy may be desirable even when there are no explicit costs of policy adjustment. Second, we solve for the optimal frequency of policy adjustment and characterize its determinants. When applied to the U.S. economy, our analysis suggests that the Federal Open Market Committee should revise the federal funds target rate no more than twice a year. Finally, the third essay, titled "Does the Federal Reserve Do What It Says It Expects to Do?", studies the behavior of the Federal Open Market Committee in setting the federal funds target rate and making a bias announcement. The current bias concerning the next interest rate decision should be the optimal forecast based on the committee's interest rate policy rule. Therefore, the interest rate implied by the estimated policy should be consistent not only with the observed rate, but also with the observed bias announcement. We jointly estimate interest rate and bias announcement decision rules and find strong consistency between the two decisions in their response to inflation. However, the response to measures of economic activity is found inconsistent.

We examine the existing fiscal policy paradigm in commodity-exporting countries. First, we argue that its centerpiece—the permanent income hypothesis (PIH)—is not consistent with either intergenerational equity or long-term sustainability in the presence of uncertainty. Policies to achieve these goals need to be more prudent and better anchored than the PIH. Second, we point out the presence of a volatility tradeoff between government spending and wealth and re-assess long-held views on the appropriate fiscal anchors, the vice of procyclicality, and the (im)possibility of simultaneously smoothing consumption and ensuring intergenerational equity and sustainability. Finally, we propose what we call a prudent wealth stabilization policy that would be more consistent with long-term fiscal policy goals, yet relatively simple to implement and communicate.