Essays in International Macroeconomics
Ersal Kiziler, Eylem
What are the factors behind differences in cyclical behavior of portfolio flowsacross countries? How important are growth rate productivity shocks, as opposed to levelproductivity shocks, in understanding those differences? Do the productivity changes inthe nontradable goods sector matter for external positions of countries? Newly advancedsolution techniques facilitate the simultaneous examination of general equilibriumdynamics and international portfolio flows. This dissertation presents a review of thesetechniques and uses them to answer above questions.Chapter 1 presents a literature review of the recent research in internationalmacroeconomics and finance. The review focuses on the work that uses new solutiontechniques to incorporate portfolio choice problems into international macroeconomicsmodels. Major subjects reviewed are divided into three main categories: (a) internationalrisk sharing and portfolio diversification, (b) international portfolio flows, and (c)valuation effects.Chapter 2 studies the cyclicality of portfolio flows under the presence ofproductivity growth rate shocks. Productivity growth rate shocks successfully replicatecountercyclical net equity outflows and procyclical bond inflows for advanced countries,which could not be captured in a model with only level productivity shocks. Similarly,for an emerging market economy, the model with growth shocks generatescountercyclical net equity inflows and procyclical bond inflows in accordance with data.Following a growth rate shock, home agents experience a decrease both in equity inflowsand outflows on impact. Inflows decrease due to sales of home equity to realize capitalgains and outflows decrease due to initial dissaving to finance increases in consumptionand investment. Equity inflows increase later, as home dividends rise. Equity outflowspick up also as wealthier home agents increase purchases of foreign assets to hedgeagainst home productivity shocks.Chapter 3 examines the valuation effects of various macroeconomic shocks onexternal wealth in a two-country four-good model of the world economy. Of the shocksconsidered, transitory shocks to the nontradable goods sector produce the stronglycountercyclical current account deficit and offsetting valuation effects observed in U.S.most closely. Transitory shocks to nontradable goods sector generate valuation effectsthat move inversely with the current account. An increase in supply of nontradable goodsincreases home demand for both nontradable and tradable goods. Home country tries tosmooth consumption by increasing borrowing and running a current account deficit. Inthe meanwhile, country experiences positive valuation effects stemming from a decline inrelative price of home equity, which reduces the value of home's foreign liabilities.
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