Essays in business cycles and international finance

Amdur, David P.

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Amdur, David P.

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Thesis (Ph.D.)--Georgetown University, 2010.; Includes bibliographical references.; Text (Electronic thesis) in PDF format. This dissertation studies financial flows within and across countries. Chapter 1 presents new evidence that gross foreign assets and liabilities in equity investments, measured at market value, are positively correlated over the business cycle in each of the Group of Seven industrialized countries (G7). The close comovement of assets and liabilities, in turn, reflects strong cross-country correlation between equity prices and moderate comovement of gross outflows and inflows. I analyze an international real business cycle (IRBC) model to evaluate possible causes of these correlations. A complete markets model with diminishing returns to capital predicts positive cross-country correlation between equity prices. I show that imperfect substitutability between goods strengthens this correlation, and I show that cross-border financial costs lead to negative correlation between gross capital outflows and inflows.; Chapter 2 seeks to explain why aggregate debt issued and equity payouts are procyclical and positively correlated over the business cycle in the U.S. I develop a real business cycle (RBC) model with an interest tax deduction and costly monitoring of firms, and I use the model to explain the dynamics of debt issued and equity payouts. The key insight is that the marginal benefit of issuing debt is constant, but the marginal cost varies over the business cycle. Economic booms both increase firms' optimal payouts and reduce the cost of borrowing by making firms appear more creditworthy.; Chapter 3 develops a two-country, two-good equilibrium endowment model in which asset trade is limited to two locally denominated real bonds. Unless the elasticity of substitution between goods is exceptionally low, the model predicts that each country will hold a short position in foreign bonds, which appears counterfactual for most advanced countries. I also consider an alternative arrangement in which only equities are traded. Under plausible assumptions, the set of parameters for which equity home bias attains (when only equities are traded) is the same set for which countries are long in foreign bonds (when only bonds are traded).