Three Essays On International Stock And Bond Markets PDF Download

This dissertation consists of three separate essays in the field of international macroeconomics. The objective of the first and third chapters is to add to the understanding of some of the aspects of international business cycle fluctuations, both of developed economies, as well as developing ones. The second chapter sheds some new light on the behavior of current account positions in advanced economies. In the first chapter, I revisit the consumption correlation as well as the Backus--Smith puzzles by inspecting the role of financial markets. Relative to the existing literature, I introduce explicit international trade in stocks and bonds in an otherwise standard model of international business cycles. The results show that markets with symmetric trade in stocks allow for a high degree of risk sharing and closely mimic the Arrow--Debreu economy despite being formally incomplete. Risk sharing decreases in asymmetric stock and nominal bond markets, but is still higher than in a single commodity bond economy. The results, therefore, cast doubt on the explanation of the two puzzles based on highly restricted asset trade and large degree of market incompleteness. I also provide empirical evidence that output net of investment and government spending tends to be less correlated across countries than consumption, much less than output itself. This constitutes a new form of the consumption correlation puzzle. The puzzle can be accounted for in the presence of high home bias and low elasticities of substitution between domestic and foreign baskets. In the second chapter, I apply the weak axiom of revealed preference theory (WARP) in the context of a 2-period model of the current account. According to this argument, certain changes in current account positions should be precluded. In particular, a country which initially ran a current account deficit, should remain in deficit after the exogenously given interest rate drops. Similarly, a country running a surplus should remain a lender if the interest rate goes up. The argument holds for both an endowment economy as well as for a model with production. To check whether the changes in CA positions are in line with WARP I employ econometric models of binary choice on a panel of 22 developed economies. The results suggest that the axiom is largely at work, i.e. I find no statistical evidence of violations of the revealed preference axiom in all but one regression. In the third chapter, I turn the attention to the peculiarities of business cycle fluctuations in developing countries. Countercyclical country interest rates have been shown to be both a distinctive characteristic and an important driving force of business cycles in emerging markets. In order to capture this, most business cycle models of emerging economies have nonetheless relied on ad hoc and exogenous countercyclical interest rate processes. I offer a solution to this shortcoming by embedding a financial contract a la citet{bgg1999} into a standard real business cycle model of a small open economy. Because of the existence of agency problems between foreign lenders and domestic borrowers, this financial structure allows me to fully endogenize the existence of an external finance premium that drives country interest rates. I then take the model to data from emerging economies and show that this modification allows to properly account for many of the stylized facts of business cycles in emerging economies, particularly the strong volatility and countercyclicality of interest rates. I also fit the model to data from developed small open economies and find that the estimated parameters that define the financial contract differ in nontrivial ways from those estimated to emerging economies.