Date of Degree

2-2020

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

Sangeeta Pratap

Committee Members

Merih Uctum

Thom Thurston

Subject Categories

International Economics

Keywords

uncertainty, capital flows

Abstract

This dissertation studies the effects of uncertainty shocks in emerging economies in a context where these economies increased their participation in international financial markets. The first chapter provides a review of the literature on how the study of uncertainty shocks recently became more relevant as a result of higher financial integration experienced by emerging economies. The second chapter aims to investigate the quantitative effects on key domestic macroeconomic variables of implementing a foreign reserves accumulation policy with full sterilization. It extends an asymmetric two-country model by introducing a global interbank market and an active domestic central bank. The goal of this policy is to mitigate the effect on the real economy of capital inflows that travel from a global bank in a large-advanced economy to a commercial bank located in a small-emerging economy. In the presence of volatility shocks, the model shows that an aggressive policy of foreign reserves accumulation diminishes the volatility of output and the real exchange rate but reduces the welfare of the households. In the case of a sudden reversal of capital flows, the model indicates how the domestic central bank helps to restore the flow of funds towards the real economy when it functions as a lender of last resort. The third chapter investigates how higher global financial integration recently experienced by emerging countries affects their accumulation of foreign assets. It extends a standard asymmetric two-country general-equilibrium model by adding a time-varying total factor productivity (TFP) volatility process and recursive preferences. The results show that the domestic household can accumulate more foreign assets, but also hedge better against domestic risk. The trade-off is a more volatile consumption (both in absolute terms and relative to output volatility). Higher integration improves households' welfare, but there seems to be no effect on risk-sharing in the model. The persistence of the volatility shock strengthens the precautionary saving motive and encourages a more significant accumulation of foreign assets in the small open economy.

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