| Summary: | In open economies, external factors have an important effect on real and nominal macroeconomic variables, and hence on economic welfare. For example, external factors such as the degree of trade openness and the level and variability of the exchange rate are important for the determination of domestic investment and domestic prices. Several aspects of the external sector and their impact on the domestic economy form the main themes that are investigated in this thesis of four main empirical chapters. Firstly, we investigate the determinants of business investment for a panel of emerging economies. We take an open economy framework incorporating the exchange rate as an important factor in a simple stylised model. To test the model implications we utilise sectoral industry data and endeavour to take account of panel heterogeneity and endogeneity in our estimation. In the empirical section of this chapter a rise in the exchange rate, a domestic currency appreciation, was found to be positively related to investment for some of the countries. We posit that this is due to the importance of the cost channel for firms. In the next chapter, we examine the impact of exchange rate volatility on sectoral investment for emerging economies. Volatile exchange rates make investment decisions in open economies difficult due to uncertainty. Our approach is robust to four different measures of exchange rate volatility. The empirical results show that permanent exchange rate volatility measure has a strong positive impact on domestic investment in the long run, which could possibly imply investors in small open economies with better financial markets are able to diversify risks. Volatility may also be more important than the level of the exchange for investment. The next chapter in this Thesis on Open Emerging Market Economies considers the extent of exchange rate pass through to import prices. In a stylized model, import prices are dependent upon the exchange rate, marginal cost and the mark up. Our results show that the average response of import prices to movements in the exchange rate is negative and incomplete. However, once we take account of exchange rate asymmetry, important differences such as market share and mark-ups exist between Latin America and Asia. The fifth chapter, and final main empirical chapter, investigates whether increased trade openness dampens relative producer prices in a panel of Indian manufacturing sector. We purport that the import share, average labour productivity and the mark-up are the key determinants of sectoral wholesale relative producer prices. After accounting for endogeneity, our main result is that, there is some evidence that rise in import share decreases the relative producer prices, but only feebly influences the decline across the sectors in India.
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