This dissertation consists of three chapters. Chapter 1 is a critical survey of the literature on the real exchange rate and welfare. First paper researches on welfare associated with two different productivities and the real exchange rate. The second paper classifies countries by regions and analyzes the effects of the real exchange rate. The emerging Asian countries are more export-intensive, so the real depreciation stimulate their economic growth while other emerging countries grow faster with real appreciation. These results rationalize the different growth patterns in different regions. In Chapter 2, I studied the role of foreign reserves. Some papers have argued that countries accumulate foreign reserves in order to deteriorate terms of trade to increase welfare. On the other hand, the optimal tariff theory argues that tariffs can increase the welfare of a country by improving its terms of trade. This paper provides a plausible explanation for the different foreign reserves policies regarding terms of trade. I build an endogenous growth model of a small open economy with technological spillovers generated from exports. Internalizing the growth effects from these externalities, the government decides whether to accumulate foreign reserves or to borrow from abroad. This paper finds that when the export externalities are large enough, it is optimal to hold positive foreign reserves to achieve faster growth through terms of trade deterioration. However, when the export externalities are small, the government holds negative foreign reserves. In Chapter 3, Jorge Mondragon and I propose a stochastic general equilibrium model of sovereign default with endogenous default risk in order to explain the interest rate behavior in emerging economies. We incorporate two types of shocks to cover foreign and domestic uncertainty. We define GDP and terms of trade shock as the domestic and the foreign uncertainty respectively. The model is able to successfully increase the dispersion of sovereign interest rates when GDP shocks are above the trend. This result seems to suggest that terms of trade is a good candidate to explain the volatility of interest rates in small open economies when they are not under recessions or crises.