Download or read book Essays on International Trade and Financial Frictions written by Jing Wang and published by . This book was released on 2017 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on International Trade Capital Flows and Financial Frictions written by Maria Margarita Lopez Forero and published by . This book was released on 2016 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Two particular concerns in international economics motivate this research: I. How are real and financial activities related to each other in a globalized economy? II. What role do financial frictions play in this relationship ? Three essays look at these questions from different perspectives. The first chapter, in collaboration with Jean-Charles Bricongne and SebastianFranco-Bedoya, revises the old question on the relation between FDI and exports on French firms, where theory seems to be at odds with empirical findings. Most FDI and most trade take place between rich markets, where the horizontal investment type is expected to happen. In this sense, empirical studies have almost invariably found a complementarity relation while standard Horizontal FDI models predict substitutability between FDI and exports given the proximity-concentration trade-off. [...]The second chapter empirically examines how external financial needs measured at the sector level- and financial development at the country level interact to shape the aggregate marginal product of capital of a country (MPK) and its foreign direct investment inflows (FDI). First, using new available data we construct annual aggregate MPK for 50 developing and developed countries during 1995-2008; we use industry-level data to construct an annual country-level measure of external financial dependence and assess its effects on MPK conditional on the level of financial development. Our findings imply that financial development seems to be a necessary condition -and certainly not a sufficient one- in order for production in financially dependent sectors to positively affect aggregate MPK in developing countries. Second, using bilateral FDI inflows in developing countries between 2001 and 2010, we analyze how external financial dependence and financial development determine FDI in flows in developing countries. [...]The third chapter, joint research with Jean-Charles Bricongne and Fabrizio Coricelli, studies the transmission of global shocks during the Great Recession and its impact on French employment. Particularly, we explore the role of trade credit in the propagation of cross-border shocks. Using a sub-sample of importing enterprises that were active over 2004-2009,our findings imply that strong pre-crisis sourcing ties with countries that were more resilient to the global crisis, translated into better performance in terms of employment growth over 2008-2009. This effect dramatically varies with trade credit intensity. Strongly relying on trade credit made firms more vulnerable to unanticipated shocks, for which the adverse impact of the crisis was exacerbated. This effect intensified among firms with important sourcing ties with severely shocked countries. While the negative effect of the crisis was mitigated when sourcing relations with countries subject to milder shocks were stronger. Supporting, therefore, the hypothesis that trade credit was an alternative source of financing for enterprises during the crisis, where implicitly borrowing from suppliers helped importers overcoming financial constraints. Our contribution to the literature adds to the debate on the role of trade finance in explaining the real economic downturn across borders.

Download or read book Essays on International Trade and Financial Developmen t written by Faezeh Raei and published by . This book was released on 2011 with total page 202 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first chapter studies the effects of financial obstacles to productivity improvement in the context of trade reforms, by constructing a dynamic heterogeneous firms model with financial frictions. Trade reforms are considered beneficial because they confront the liberalized country's firms with more competition from abroad and increase their incentives to become more efficient. This implies that if poor countries do not improve their productivities they might lose the intended gains from liberalization. Financial frictions however have been quoted an important obstacle for firms to improve their productivities. To address these issues, first, using data on 15 trade liberalization episodes, I document that more financially developed countries experienced more productivity growth after their trade liberalization. Second, I construct a dynamic heterogeneous firms model with financial frictions in financing costs for productivity improvement. Calibrated numerical exercises show that if a country does not improve its financial intermediaries at the outset of trade liberalization it may lose as much as %40 of potential output gains and productivity improvements. The result has policy implications regarding the simultaneous reforms in trade and financial intermediaries. The second chapter is a cross country empirical analysis aiming to provide evidence for the effects of trade openness and financial development on firms decision to upgrade their technology and the impact on the distribution of firm size across countries. The idea is that reduction of trade barriers is likely to affect incentives of bigger firms to grow to export markets as well as incentives of smaller firms to innovate due to increased competition. Financial frictions, however are likely to limit the scope of these decisions and more so for smaller firms and capital intensive industries. This is likely to have heterogeneous effects on firms leading to changes in firm size distribution. I hypothesize that a combination of trade openness and low financial development increases the relative size of big to smaller firms. To test this hypothesis, I take advantage of cross country/industry differences in trade protection and financial development/needs to provide enough variation for identifying these effects. Using establishment level data from OECD countries, I provide evidence for this hypothesis, by performing double difference estimations. In addition using firm level data on 20,000 firms from World Bank's enterprise survey, I provide more evidence that trade openness promotes productivity growth particularly for bigger firms in less financially developed countries. The finding contributes to the literature on importance of finance for firm growth by focusing on the channel of heightened competition due to trade. It highlights the importance of incorporating financial aspects of a country in trade analysis. The third chapter is an exercise exploring the welfare gains of trade in a North-South trade where counties are asymmetric in their ability to produce more sophisticated goods. The exercise is based on the model by Matsuyama (JPE 2000), where the world is a static Ricardian model with a continuum of goods and unit demand non-homothetic preferences. One country (the south) has comparative advantage in production of goods with lower income elasticity of demand. As a result, over time with uniform global improvement in technology in the form of smaller unit labor requirements, the terms of trade moves against south. The numerical exercise, calibrates stochastic interpretation of the model to for a specific choice of countries and provides evidence that over time, if the patterns of specializations are not changed drastically, the country specialized in production of less sophisticated goods disproportionately grows less than the other one and has the terms of trade moving against it.

Download or read book Essays on Economic Volatility and Financial Frictions written by Hongyan Zhao and published by . This book was released on 2012 with total page 202 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays in macroeconomics. The first one essay discusses the reasons of Chinese huge foreign reserves holdings. It contributes to the literature of sudden stops, precautionary saving and foreign assets holdings. In the second essay, I study the price volatility of commodities and manufactured goods. I measure the price volatility of each individual goods but not on the aggregated level and therefore the results complete the related study. The third essay explores the correlation between the relative volatility of output to money stock and financial development. It extends the application of financial accelerator model. In the first essay, I address the question of China's extraordinary economic growth during the last decade and huge magnitude of foreign reserves holdings. The coexistence of fast economic growth and net capital outflow presents a puzzle to the conventional wisdom that developing countries should borrow from abroad. This paper develops a two-sector DSGE model to quantify the contribution of precautionary saving motivation against economic sudden stops. The risk of sudden stops comes from the lagged financial reforms in China, in which banks continue to support inefficient state-owned enterprises, while the more productive private firms are subject to strong discrimination in credit market, and face the endogenous collateral constraints. When the private sector is small, the impact on aggregate output of binding credit constraints is limited. However, as the output share of private sector increases, the negative effect of financial frictions on private firms grows, and it is more likely to trigger a nation-wide economic sudden stop. Thus, the precautionary savings rise and the demand for foreign assets also increases. Our calibration exercise based on Chinese macro data shows that 25 percent of foreign reserves can be accounted for by the rising probability of sudden stops. The second essay studies the relative volatility of commodity prices with a large dataset of monthly prices observed in international trade data from the United States over the period 2002 to 2011. The conventional wisdom in academia and policy circles is that primary commodity prices are more volatile than those of manufactured products, although most existing studies do not measure the relative volatility of prices of individual goods or commodities. The literature tends to focus on trends in the evolution and volatility of ratios of price indexes composed of multiple commodities and products. This approach can be misleading. The evidence presented here suggests that, on average, prices of individual primary commodities are less volatile than those of individual manufactured goods. Furthermore, robustness tests suggest that these results are not likely to be due to alternative product classification choices, differences in product exit rates, measurement errors in the trade data, or the level of aggregation of the trade data. Hence the explanation must be found in the realm of economics, rather than measurement. However, the challenges of managing terms of trade volatility in developing countries with concentrated export baskets remain. The third essay tries to understand why the relative volatility of nominal output to money stock is negatively related to countries' financial development level from cross-country evidence. In the paper I modify Bernanke et al. (1999)'s financial accelerator model by introducing the classic money demand function. The calibration to US data shows that the model is able to replicate this empirical pattern quite well. Given the same monetary shocks, countries with poorer financial system have larger output volatility due to the stronger effect of financial accelerator mechanism.

Download or read book Three Essays in International Macroeconomics written by Susanne Ingrid Karbe and published by . This book was released on 2022 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on International Trade Productivity and Growth written by Leilei Shen and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in International Finance and Macroeconomics written by Matteo Maggiori and published by . This book was released on 2012 with total page 234 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation explores the relationship between international financial markets, financial frictions, and the real economy. In particular, the dissertation focuses on the role of the United States of America (US) as the key country in the global financial architecture. The research presented here advances the study of international finance and macroeconomics by analyzing how the combination of two factors, the greater financial development of the US and financing frictions, leads to the special global roles of the US funding markets and the US dollar. In the first Chapter of the dissertation, I develop a model of financial intermediation in a closed economy, which is also the key building block of the open economy analysis in the second Chapter. In an economy with savers and financial intermediaries where financing frictions are present, the state of the financial sector becomes the key state variable. The financing frictions, modeled as the limited enforceability of deposit contracts, prevent capital from flowing freely from savers to the financial intermediaries that ultimately allocate capital to productive real assets. When financial intermediaries are well capitalized, their capital acts as a safety buffer for potential investment losses and, consequently, financing frictions are alleviated. In this state of the world, financial markets closely resemble those of the standard frictionless asset pricing framework. When, on the other hand, intermediaries are poorly capitalized, concerns for potential losses of capital disrupt the financing markets. In this state of the world, capital does not flow smoothly from savers into productive assets via financial intermediaries. In general, risky assets' prices fall and their volatility increases, thus replicating typical features of financial crises. Interestingly, these effects are highly non-linear. In the second Chapter, I provide a framework for understanding the global financial architecture as an equilibrium outcome of the risk sharing between countries with different levels of financial development. The country that has the most developed financial sector takes on a larger proportion of global fundamental and financial risk because its financial intermediaries are better able to deal with funding problems following negative shocks. This asymmetric risk sharing has real consequences. In good times, and in the long run, the more financially developed country consumes more, relative to other countries, and runs a trade deficit financed by the higher financial income that it earns as compensation for taking greater risk. During global crises, it suffers heavier capital losses than other countries, exacerbating its fall in consumption. This country's currency emerges as the world's reserve currency because it appreciates during crises and so provides a good hedge. The model is able to rationalize these facts, which characterize the role of the US as the key country in the global financial architecture. In the third Chapter, I provide empirical evidence on the role of the US dollar as a global safe asset. This empirical evidence provides one of the stylized facts analyzed in my theoretical work. I show that the US dollar earns a safety premium versus a basket of foreign currencies and that this premium is particularly high in times of global financial stress. These findings support the view that the dollar acts as the reserve currency for the international monetary system and that it is a natural safe haven in times of crisis, when a global flight to quality toward the reserve currency takes place. During such episodes, investors are willing to earn negative expected returns as compensation for holding safe dollars. I estimate the time varying dollar safety premium by using instrumental variable techniques to condition information down.

Download or read book Essays on Trade Policies written by Mengqi Wang and published by . This book was released on 2024 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation aims to comprehensively analyze the influence of government policies in international markets on agent decisions, as well as the broader macroeconomic implications of these policies. Reducing trade costs significantly affects how resources and economic activities are distributed spatially. Yet, internal frictions, particularly common in developing countries, obstruct efficient resource allocation across regions. Developing nations address this by combining trade liberalization with internal reforms or subsidies. Understanding how these reductions in trade costs and the mitigation of internal frictions interact is crucial for assessing policy effectiveness, especially regarding export outcomes. In Chapter One, titled "Spatial Implications of Trade Cost Reduction with Resource Reallocation Frictions,'' a dynamic spatial general equilibrium model is developed to study how changes in external trade costs and internal frictions affect export growth. The model incorporates costs of goods trade within and across borders, labor migration, and firms' borrowing. Using China's early 2000s reforms for calibration, the analysis shows that both external and internal reforms significantly boosted export growth, with domestic financial frictions playing a key role. Additionally, the study identifies a complementary relationship between external and internal factors, emphasizing the importance of addressing financial frictions and capital accumulation to enhance the effectiveness of trade cost reduction. The redistribution of resources among firms is another reason economic frictions may impede export growth following reductions in external trade costs. Chapter Two, titled "Internal Reforms, Trade Liberalization, and Labor Market Outcomes in China,'' investigates how changes in trade costs and the size of the state-owned sector influence unemployment rates and job turnovers. Using a small open economy model, calibrated with early 2000s reforms in China, I find that reducing trade costs alone has minimal impact on labor markets without concurrent reductions in the state-owned sector size. This chapter underscores the complementary effect, emphasizing the enhanced labor market adjustments resulting from trade cost reductions combined with reductions in the state-owned sector size. Recent trade tensions have underscored the risks associated with policy-induced geoeconomic fragmentation, emphasizing the importance of understanding complex global supply chains and trade partnerships. Chapter Three, titled "Trade Diversion Effects from Global Tensions'' (co-authored with Swarnali Ahmed Hannan), estimates the trade diversion effect on Mexico's exports to the United States during the 2018 U.S.-China trade tensions. We find positive trade diversion effects, with the U.S. shifting imports from China to Mexico, particularly for products affected by U.S. tariffs on Chinese goods. However, limited evidence suggests significant transmission of the trade diversion effect through input-output linkages in the short run.

Download or read book Three Essays in International Trade and Finance written by Huancheng Du and published by . This book was released on 2018 with total page 133 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation explores the economic interactions and outcomes in the nexus of international trade and finance. The entire dissertation is divided into three chapters with each chapter addresses one specific economic problem that roots in the interaction of international trade and finance. In the first chapter, I attempt to draw theoretical implications on two particular questions. First, what is the trade liberalization effect on capital market outcomes? Second, how do trade liberalization and capital market conditions jointly affect labor market outcomes such as income inequality? The objective of this chapter is to integrate both labor market frictions and capital market imperfection into one coherent theoretical framework and study the important interactions of trade liberalization and financial market development, as well as their joint impacts on aggregate income inequality. In the second chapter, I aim to provide both theoretical foundation and empirical evidence in partially explaining country authorities' decisions on financial policies. In the third chapter, [w]e provide a novel way of extracting country-level fundamental news from the international trade network. Specifically, we show that sovereign CDS returns provide value-relevant information that slowly propagates through credit markets reflecting underreaction on a global scale.

Download or read book Essays on Macroeconomics with Financial Frictions written by Dominik Thaler and published by . This book was released on 2016 with total page 104 pages. Available in PDF, EPUB and Kindle. Book excerpt: The first chapter of this thesis, joint with Angela Abbate analyses the importance of the risk-taking channel for monetary policy. To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem which distorts banks’ incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show that this novel transmission channel generates a new and quantitatively significant monetary policy trade-off between inflation and real interest rate stabilization: it is optimal for the central bank to tolerate greater inflation volatility in exchange for lower risk taking. The second chapter develops a quantitative model of sovereign default with endogenous default costs to propose a novel answer to the question why governments repay their debt. In the model domestic banks are exposed to sovereign debt. Hence sovereign default causes large losses for the banks, which translate into a financial crisis. The government trades these costs off against the advantage of not repaying international investors. Besides replicating business cycle moments, the model is able to generate not only output costs of a realistic magnitude, but also endogenously predicts that default is followed by a period during which no new foreign lending takes place. The duration of this period matches empirical estimates. The third chapter outlines a method to reduce the computationally necessary state space for solving dynamic models with global methods. The idea is to replace several state variables by a summary state variable. This is made possible by anticipating future choices that depend on one of the replaced variables. I explain how this method can be applied to a simple portfolio choice problem.

Download or read book Essays in International Trade with Market Frictions written by Lijuan Yin and published by . This book was released on 2017 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis contains three essays on International Trade and Market Frictions. Chapter 1 investigates the effects of globalization on human capital investment under labor market frictions. I present a new economic geographical general equilibrium model with individuals' endogenous education choices in the institutional context of China. The model indicates that the expanding market access due to globalization, along with the restrictive household registration system and rural land policies of China, tends to intensify rural-urban college educational inequality, although globalization promotes the total human capital formation; such effects of market access on urban-rural dispersions vary across regions. Based on the testable predictions of the model from chapter 1, Chapter 2 quantified the effects imposed by market access on individuals' education decisions by using China Income Project Data for year 1995 and 2002. Chapter 2 demonstrated that each one percent increase in market access is associated with an increase in the difference between the probability of getting higher education for urban hukou holders by around 1.2 percentage points than that for rural hukou holders. Chapter 2 also provides a discussion of the econometric issues in identification and estimation of the effects of market access on individuals' education choices. Chapter 3 moves beyond labor market frictions to study the role of China's extensive subsidies in an open economy. We build a general equilibrium open economy model with heterogeneous firms to quantify the welfare effect of Chinese capital-biased subsidies. Firms are heterogeneous not in the productivities but also their capabilities to obtain subsidies from the government. Combining this two characteristics, the government decision rule is revealed as the distribution of subsidized firms which we can observe and calibrate from the Chinese firm-level data.

Download or read book Essays on Macroeconomic Effects of International Trade Barriers written by Soo Kyung Woo and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: "This dissertation is comprised of three essays regarding the role of trade barriers for international capital flows and prices. The study aims to understand the effect of changes in trade costs at various aspects: cross-country differentials, global integration, and within-country distributional effects. The first chapter studies the drivers of the US real exchange rate (RER), with a particular focus on its comovement with net trade flows. We consider the entire spectrum of frequencies, as the low-frequency movements account for 83% of the RER's unconditional variance. We introduce a model with heterogeneous firms facing sunk costs of exporting, financial shocks, and trade shocks. The model can fully capture the comovement of the RER and net trade flows at all frequencies, without compromising other major moments at the business cycle frequency. While financial shocks are necessary to capture the RER movements at higher frequencies, trade shocks are essential for lower frequency variation. The second chapter studies the factors accounting for the large, coincident increases in international borrowing and lending and international trade from 1970 to the present. We focus on the rise in annual changes in borrowing and lending across countries as summarized by the rise in the dispersion of the trade balance as a share of GDP. We show that these two salient features - a rise in net and gross international trade - are largely a consequence of a reduction in intratemporal trade barriers rather than a substantial reduction in the frictions on intertemporal trade or greater asymmetries in business cycles. Beyond explaining changes in the distribution of gross and net trade, the fall in frictions on intratemporal trade are consistent with the reduction in dispersion in other key macro time series such as the real exchange rate, terms of trade, and export-import ratio. The third chapter studies the dynamic effect of trade liberalization on wages and consumption, exploiting cross-region variation in the United States at the state level after the U.S.-Korea Free Trade Agreement. A key feature is a theoretically sound measurement of a regional exposure that takes into account the elasticity of substitution and covers all potential channels of tariff impacts. Using the measures for the Local Projection Method, I find that less protection at home is associated with a persistent negative impact: by the 8th quarter, a state at the upper quartile of the barrier cut experienced a decline in wage and consumption that is 1.56 and 1.04 percentage points larger, respectively, than a state at the lower quartile. However, cheaper access to imported inputs has a positive but temporary impact: by the 8th quarter, an upper quartile state experienced an increase in wage and consumption that is 1.62 and 1.45 percentage points larger, respectively. More opportunities to export have little effect."--Pages viii-ix.

Download or read book Essays in International Trade and Financial Economics written by and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on International Macroeconomics and Policy written by Tian Xia and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: As the world economy becomes rapidly integrated through the globalization of markets for goods and services, it is crucial to understand how cross-country linkages through goods and financial markets explain observed business cycles in data. Furthermore, interdependent open economies imply that optimal policy is unlikely to be responding to domestic shocks only. This dissertation studies various aspects of open economies from a macroeconomic perspective and discusses related theoretical policy implications. Chapter 1 investigates the implication of intermediate goods on optimal monetary policy in open economies, and in particular, focusing on the welfare gains from monetary cooperation. In a relatively standard two-country dynamic stochastic general equilibrium model with input-output relations, I demonstrate that introducing intermediate goods can amplify the welfare gains caused by cost-push shocks by an order of magnitude larger. A detailed analysis on the equilibrium dynamics highlights a new channel that is absent in the previous literature: non-cooperative central banks respond differently to shocks in the intermediate goods market versus shocks in the final goods market, even if these shocks generate the same distortions when the two central banks cooperate. Furthermore, I find that increasing the degree of openness in the intermediate goods market can reduce the welfare gains from monetary cooperation. This casts doubt on whether the recent trend in international economic integration may justify the potential need for international monetary cooperation. Chapter 2 develops a simple framework for computing equilibrium shares of trade currency invoicing in open economy dynamic stochastic general equilibrium models. The solution method follows closely to Devereux and Sutherland (2011)'s method in solving portfolio choice by applying information from second-order approximations of equilibrium conditions to solving zero-order portfolio shares. The framework is flexible enough to be extended to a Rotemberg sticky price model. To illustrate the approach, I use a simple symmetric two-country model and show that the results are consistent with existing theoretical findings on how monetary policy affects exchange rate pass-through. Chapter 3 investigates the interaction between inequality and financial development in determining the condition for rational asset bubbles to emerge in general equilibrium. I develop a simple overlapping generations model (OLG) with a production economy and financial frictions, which shows that wage inequality can cause dynamic inefficiency in an economy with an underdeveloped financial sector. Furthermore, the model developed in the chapter indicates that trade integration can create asset bubbles through the channel of increasing inequality. The result is consistent with observations where developing countries with export-led growth seem to experience episodes of bubble-like asset price booms and busts in the last three decades.

Download or read book Essays on International Economics written by Julian P. Diaz and published by . This book was released on 2007 with total page 234 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays in the US Dollar Dominated International Financial Market written by Zefeng Chen and published by . This book was released on 2021 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation studies a special feature about the international financial market. Classical theories often assume that countries are symmetric, but realistically the international financial market is heavily US dollar dominated, which stimulates my interest to study whether this role of the US dollar can resolve numerous puzzles that classical theories are unable to reconcile with empirical facts, as well as to study policy implications. The role of the US in the international market is mainly unique in two aspects. First, the US dollar is the dominant currency used in international trade. Second, the US treasuries are considered as the most widely accepted safe assets. In this dissertation, the first two chapters study the safe asset role, and the third chapter explores the invoicing currency role. The first chapters analyzes the phenomenon called the US 'Exorbitant Privilege', which describes the fact that the US is the only large net borrower country in the world earning a positive net investment income. To rationalize this phenomenon, I propose a different theory about the role of US in the international financial system being a service provider, in contrast to the conventional view of an insurance provider, which predicts the US exorbitant privilege would vanish during the financial crisis, not supported by data. I build a two-country model with financial friction to explain the dynamics of the US external balance sheet and the dollar exchange rate. In the model, world financial intermediaries demand US safe assets for their convenience value, but US intermediaries do not demand foreign safe assets. Under an aggregate symmetric financial shock, the rest of the world buys more safe assets from the US despite a rise in convenience yield, the dollar appreciates, and the US takes advantage by buying more equities from the rest of the world at a low price. I show my mechanism can quantitatively explain the data, while a real shock triggering risk-sharing dynamic cannot. The second chapter is a paper completed with coauthors Shanaka J. Peiris and Sanaa Nadeem from the IMF. We take a perspective from Asian small open economies against external shocks driven by the US dollar. We focus on the banking sectors in those economics because in emerging Asia banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs). The third chapter written with coauthors Zhengyang Jiang and Timothy Mok, exhibits a channel of how US monetary policy can have an asymmetric spillover effects and hence how the US can take advantage. We develop a model of two countries, U.S. and Japan. Households in both countries need to hold cash in advance to purchase consumption goods: The U.S. dollar can be used to purchase both countries' goods, while the Japanese yen can only be used to purchase Japan's goods. Under these constraints, an expansionary U.S. monetary policy leads to (1) a larger U.S. trade deficit, (2) larger foreign holdings of the U.S. dollar, and (3) an appreciation of the U.S. real exchange rate. In contrast, the Japanese monetary policy has none of these real effects. Beyond asymmetric monetary effects, our novel mechanism also explains the correlation between consumption and real exchange rate, and the connection between foreign economic growth and the demand for the U.S. dollar.

Download or read book Essays on Frictions in Financial Macroeconomics written by Benjamin S. Kay and published by . This book was released on 2012 with total page 152 pages. Available in PDF, EPUB and Kindle. Book excerpt: Building on Flavin and Nakagawa (2008), chapter one models household optimal consumption and portfolio selection when consumption services are generated by both housing and non-housing consumption. Housing is illiquid in that a non-convex adjustment cost must be paid when it is sold. It is shown that optimal consumption of housing is not a constant fraction of wealth but instead depends on the ratio of wealth to housing and the price of housing. Households adjust housing infrequently, waiting for large wealth changes before adjustment. As in models without this adjustment cost, households adjust non-housing consumption each period. Unlike in frictionless models, non-housing consumption is not a constant fraction of wealth. For particular parameters of the utility function and asset markets drawn from the literature, model simulations match aggregate consumption dynamics better than alternative frictionless models, even those with homes as assets. The simulations also predict differing responses of households with different fractions of their wealth in housing. In chapter two, stock market makers are afraid that informed insiders will take advantage of them in trade. To protect themselves, they may increase the bid-offer spread to include a fee for the adverse selection risk . If set correctly, market makers will share in profits from others trading on private information and can distribute the remaining costs among other market participants. If market makers protect themselves this way, then when the risk of informed trading is relatively low, the bid-offer spread should decline. The risk of informed trading will be relatively low when the difference in public and private information shrinks. Filings with the Securities and Exchange Commission (SEC) and conference calls where corporate earnings are announced and discussed should be events that diminish this difference. Because smaller companies attract less scrutiny, they may experience relatively larger changes in this information distance after these releases. This paper finds weak evidence that spreads diminish when this information is released and a weak size effect. It hypothesizes that the bid-offer spread seems to be unresponsive to information and company size because the adverse selection component of the spread is smaller than has previously been estimated does or possibly does not exist. Estimates of this spread are actually a statistical illusion created by the structural form of earlier estimation techniques. The recent global financial crisis suggests the post-1984 Great Moderation has come to an abrupt end. How we obtained nearly 25 years of stability and why it ended are ongoing puzzles. Chapter three depart from traditional monetary policy explanations and consider two empirical regularities in US employment : i) the decline in the procyclicality of labor productivity with respect to output and labor input and ii) the increase in the volatility of labor input relative to output. We first consider whether these stylized facts are robust to statistical methodology. We find that the widely reported decline in the procyclicality of labor productivity with respect to output is fragile. Using a new international data set on total hours constructed by Ohanina and Raffo (2011) we then consider whether these moments are stylized facts of the global Great Moderation. We document significant international heterogeneity. We then investigate whether the role of labor market frictions in the US as found in Galí and van Rens (2010) can explain the international results. We conclude that their stylized model does not appear to account for the differences with the US experience and suggest a direction for future research.