My dissertation consists of three chapters studying imperfections in the international financial markets and their policy implications.
The first chapter, "Government Spending During Sudden Stop Crises," investigates the state-dependent effects of government spending in financially-constrained economies. First, I provide the cross-country evidence that spending policy is more effective in stimulating consumption and appreciating the real exchange rate during sudden stop crises than normal times. Then, I show this pattern can be rationalized by proposing a financial channel of government spending in a model with the collateral constraint on external debt. An increase in government purchases can raise asset prices and drive-in capital flows when the financial constraint is binding, thereby creating larger multipliers on private consumption.
The second chapter, "Fiscal Commitment and Sovereign Default Risk," (joint with Hewei Shen) considers the interaction between sovereign default risk and fiscal policy disciplines. For fiscal policies set at discretion, the government does not incorporate the effects of their taxation decisions on past bond prices, resulting in too many defaults and too few fiscal adjustments. We show that the ability to commit tax rates can mitigate the government's default incentives and improve its borrowing opportunities. Moreover, instead of committing to a single tax rate, introducing a more flexible commitment device that depends on economic conditions can further reduce default risk while preserving the contingency of pro-cyclical fiscal policy.
The third chapter, "Sudden Stops with Local Currency Debt: Discriminating Capital Control Tax," (also joint with Hewei Shen) develops a sudden stop model with real exchange rate fluctuations and local-currency denominated debt (LCD). Under exchange rate risk, LCD provides partial insurance for domestic agents, but an expectation of devaluation during financial crises makes LCD expensive, incentivizing borrowers to issue foreign currency debt (FCD). Compared with the constrained-efficient allocation, private agents undervalue the hedging benefit of issuing LCD, while overvalue its cost, resulting in too much debt issuance in foreign currencies. This externality suggests using discriminating capital controls based on the currency denomination of international debt portfolios.
|Commitee:||Guler, Bulent, Hatchondo, Juan Carlos, Walker, Todd B.|
|School Location:||United States -- Indiana|
|Source:||DAI-A 81/2(E), Dissertation Abstracts International|
|Keywords:||Fiscal policy, International finance, Open macroeconomics|
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