Essays on International Macroeconomics

Paper 1:

We investigate the international distribution of external balances using a world economy model featuring country-specific macroeconomic uncertainty. Incomplete international financial markets and a collateral constraint on borrowing both serve to limit risk-sharing opportunities. In this environment, insurance against uncertainty takes the form of physical capital accumulation and intertemporal trade between countries. The cross-country dispersion of net foreign assets is close to its empirical counterpart. Macroeconomic uncertainty accounts for about one third of the international variation of cross-border asset holdings in the model. Approximations suggest that decreases in financial frictions were an important driver of increases in the international dispersion of external balances observed in the data.

Paper 2:

I investigate the effect of real exchange rate movements on the international distribution of external balances in a model world economy featuring incomplete markets. Intertemporal trade between nations is the only means of insuring against country-specific uncertainty. By changing the return to delaying consumption, fluctuations in the real exchange rate influence the accumulation of foreign assets. In a plausibly calibrated approximation of the model, the proportion of the cross-country dispersion of net foreign assets, the current account and the trade balance that can be attributed to the effect of real exchange rate movements is 23, 35 and 53 percent respectively.

Paper 3:

The link between exchange rate flexibility, the international balance sheet and economic recoveries is analysed in this paper through the application of OLS and two-stage least squares estimators to a dataset covering 201 recovery episodes occurring between 1971 and 2007. An instrument representing the history of exchange rate regime choice in the years immediately preceding the recovery is used to identify exogenous variation in exchange rate flexibility for the two-stage least squares procedure. Our results suggest that when external foreign currency denominated debt liabilities are relatively large, a pegged regime is associated with significantly faster real GDP growth than a non-pegged arrangement during a recovery. This finding can be rationalised on the basis that when external foreign currency denominated borrowing becomes sufficiently large, the adverse balance sheet effects associated with higher levels of exchange rate flexibility begin to significantly outweigh the beneficial expenditure switching effects.