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Open Access Dissertation

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First Advisor

Robert J. Rossana


This dissertation identifies real, nominal, and financial shocks in the U.S. and observes their effects on U.S. as well as G�macroeconomic variables. First, the real and nominal shocks in the U.S. are identified by using long-run implications of an open economy stochastic macroeconomic model, and the effects of these shocks are observed in real GDP, real effective exchange rates, and the prices for the U.S. relative to each of six other G�7 countries. While Blanchard and Quah's long-run identification strategy is used to identify the shocks, short-run implication of the model are also exploited, as a prima facie evidence, by applying appropriate sign restrictions in the contemporaneous coefficient matrix in the VAR estimation. Consistent with the model's predictions, a positive supply shock results in an increase in relative U.S. real GDP and a real depreciation of U.S. currency whereas nominal shocks in the U.S. lead to an increase in relative U.S. real GDP and relative U.S. prices. The application of short-run dynamics with proper sign restrictions produces exchange rate overshooting following the U.S. real shocks. Second, A VAR is estimated to provide empirical evidence on the international transmission of U.S. financial shocks on the U.S. as well as on the rest of G�7 macroeconomic variables. A shock to the U.S. financial sector causes a negative and immediate impact on U.S. real GDP and industrial production. Banks' capital position deteriorates immediately whereas exchange rates and foreign exchange reserves situations worsen after few quarters of shocks hitting the U.S. economy. The international transmission effects demonstrate that transmits a negative effect on real GDP and stock prices in the rest of G�7 countries. The U.S. shocks also lead to a decline in the interest rates in all other countries, showing that other countries follow the U.S. policy of reducing interest rates after a trigger of the crisis in the U.S..

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