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The thesis applies a variety of DSGE models to a set of problems whose common link is the analysis of economic fluctuations. The DSGE methodology is applied first to the analysis of economic fluctuations in Italy. After documenting' the crucial features of economic fluctuations in Italy (high volatility of hours worked and low volatility of employment), the thesis explains why the standard RBC model cannot reproduce them. Therefore, a modified RBC model with labour adjustment costs and an underground sector is introduced, and its performance analysed. Then, the thesis utilizes DSGE theory to study how fluctuations are transmitted within and between countries. Using a two-country general equilibrium model with monopolistic competition and sticky prices, it examines first the relative effects of a wide range (money, supply and demand) of shocks, and then the aggregate effects separately. The relative effects are the consequences of shocks for the relative price and quantities of domestic tradeables versus nontradeables. The main finding is that not only sector- specific shocks affect these relative prices and allocations, but also aggregate monetary shocks, thus contributing to explain why money has sectoral effects, as in the empirical literature. The aggregate effects are the consequences of shocks for the main macroeconomic variables. The analysis of the aggregate effects differs from the most recent literature because: 1) the role of critical parameters in the transmission is analysed simultaneously 2) the analysis is not confined to monetary shocks 3) supply and demand shocks are disaggregated by sector 4) the assumptions that the marginal productivity of labour may be decreasing, and that individuals cannot work in both sectors, are introduced. The aggregate effects of the shocks depend on the choice of parameters. The assump tion that individuals cannot work in both sectors leads to a lower elasticity of marginal costs with respect to output.

The objective of this thesis is to explain and empirically evaluate real business cycle (RBC) models in small and emerging economies. The focus of the thesis is to explore the role of financial sector in propagation and amplification of real business cycle in these economies. This objective is achieved through self-contained chapters (chapter 2-6) where one or more forms of financial features of interest are incorporated. The thesis makes theoretical and empirical contribution to real business cycle literature on small and emerging economies through methodological innovation used to incorporate financial features and empirical estimation of the models using Bayesian framework. The theoretical and empirical work is direct at establishment of real business cycle properties and processes of the Maldives. As of my knowledge, there are no empirical studies done to document and explain business cycle in the Maldives. One of the reasons for lack of studies are due to scarcity of relevant data. A small but growing literature is emerging in relation to exchange rate regime and the effect of exchange rate on domestic prices. However, to fully understand the impact of exchange rate in a dollarized economy like the Maldives, an appropriate general equilibrium framework with exchange rate is needed. This thesis therefore contributes to such a framework. Furthermore, using Chapter 3, I have addressed the gap in data availability and quality by comparing a database developed using archives with the secondary sources. The literature studying role of financial friction and dollarization in the propagation and amplification of business cycle through RBC framework is a growing area. Empirical work incorporating liability dollarization using RBC framework is scarce. The overall result from thesis is summarised as follows: Maldivian business cycle follows the predictions from the literature; dollarization, real exchange rate and risk premium are the main drivers of business cycles.