Three essays in international macroeconomics

Abstract

This thesis sheds light on three questions in international macroeconomics. The first chapter investigates why business cycle correlations are state-dependent and higher in recessions than in expansions. I suggest a mechanism to explain why this is the case. Therefore, I build an international real business cycle model with occasionally binding constraints on capacity utilization which can account for state-dependent cross-country correlations in GDP growth rates. Empirically, I successfully test for the presence of capacity constraints using data from the G7 advanced economies in a Bayesian threshold autoregressive (T-VAR) model. This finding supports capacity constraints as a prominent transmission channel of cross-country GDP asymmetries in recession compared to expansions. The second chapter is joint work with Mathias Hoffmann and Sven Blank of the Deutsche Bundesbank. It analyzes how foreign direct investment (FDI) influences optimal country portfolio diversification. In a DSGE model that features the endogenous choice of firms to become internationally active through either exports or foreign direct investment (FDI), we find that the optimal equity holdings of agents are more biased towards domestic firms than in a model without FDI. The third chapter explores under which circumstances member countries of a monetary union will not find it optimal to bail each other out. To investigate these circumstances, I build a model of cross-country holdings of sovereign debt with the possibility of default, as well as the possibility to negotiate a bailout for a struggling country. I show that if there is a representative household in each individual member country, a bailout solution always exists. In a second version of the model that involves heterogeneity in household wealth within the bailout providing country, the utilitarian government of this country optimally refuses a bailout in some states of the world.