Three essays in macroeconomics and finance

Abstract

This thesis addresses three issues in the fields of macroeconomics and international finance. The first chapter examines how institutional investors, such as mutual funds and hedge funds, tend to transmit economic and financial shocks across borders. Using a novel micro-level dataset on portfolio investments from a vast number of funds located in advanced markets, I find strong evidence of contagion propagating through the fund industry. Changes in economic and financial conditions in advanced markets generate global waves of portfolio inflows (outflows) with a massive impact on emerging markets’ funding. I illustrate this finding by deriving contagion maps showing where contagion spreads and with what intensity. I also find that countries that are politically unstable and that are remote from the main financial centers are the main victims of such contagion. Overall, the results clearly suggest that push effects from advanced market investors affect developing countries and expose them to sudden stops and surges. The second chapter, co-authored with Shekhar Aiyar, Romain Duval, Longmei Zhang and Yiqun Wu, investigates the existence, and potential determinants, of the so-called “middle income trap”, defined as the phenomenon of rapidly growing economies stagnating at middle-income levels and failing to graduate into the ranks of high income countries. We examine the middle-income trap as a special case of growth slowdowns and identify slowdowns as large sudden and sustained deviations from the growth path predicted by a basic conditional convergence framework. We then examine their determinants by means of probit regressions, looking into the role of institutions, demography, infrastructure, the macroeconomic environment, output structure and trade structure. Two variants of Bayesian Model Averaging are used as robustness checks. The results—including some that speak to the special status of middle-income countries—are then used to derive policy implications. The third chapter, co-authored with David Pothier, proposes a theory explaining the cyclical properties of the income distribution. We develop a two sector general equilibrium model in which agents have non-homothetic preferences and differ in terms of their initial ownership of capital. We show that when sectors differ in terms of their relative labour- and capital-intensity, changes in the composition of aggregate demand is an important channel through which productivity shocks are propagated through the economy. We then use this framework to study the distributional consequences of business-cycle shocks. Consistent with empirical evidence, we find income inequality (as measured by the Gini coefficient) to be counter-cyclical and this effect to be driven mostly by changes in the level of employment and, to a lesser degree, by changes in relative factor prices. Interestingly, we also find that changes in the concentration of capital ownership have negligible effects on both the level and the cyclical properties of income inequality.