Essays on International Finance and Banking

Abstract

Chapter 1 explores the impact of banks' exposure to market liquidity risk through wholesale funding on their supply of credit during the global financial crisis of 2007-2008. The methodology minimizes the impact of confounding demand factors, by focusing on supply of mortgage lending. By using disaggregated data on mortgage applications, the time variations in banks' decisions to grant mortgage loans is examined, while controlling for bank, borrower, and regional characteristics. The empirical results strongly support the hypothesis that banks which were more reliant on wholesale funding decreased their lending significantly more than retail-funded banks during the crisis. This result holds at the national level as well at the sub-national level in most of the largest Metropolitan Statistical Areas. To further control for applicant characteristics across banks, four million data points are reduced to thousands of pairs of virtually indistinguishable applications and the initial results are still conserved. While the willingness to supply loans was affected by banks' liability structure during the crisis, we find that the demand for mortgages decreased evenly along funding strategy dimension.

Chapter 2 compares the accuracy of the two existing methods for solving stochastic general equilibrium models with dynamic portfolio choice and incomplete markets. The accuracy of these solution methods for the real as well as portfolio variables is analyzed by studying the distribution of Euler equation errors and using a series of accuracy tests. The results indicate that while both methods generate sufficiently accurate solutions for the real variables, there are significant gains from using one method over another when solving for the portfolio allocations.

Chapter 3 employs a novel data set on non-resource GDP to examine the performance of commodity exporting countries in terms of macroeconomic stability and economic growth in a panel of up to 129 countries during the period 1970-2007. Empirical results suggest that the overall government spending in commodity-exporting countries has been procyclical. Moreover, resource windfalls initially crowd out non-resource GDP which then increases as a result of the fiscal expansion. Finally, in the long-run resource windfalls have negative effects on non-resource sector GDP growth.