| The first chapter of this dissertation studies the determinants of foreign stocks holdings. The household finances literature documents a large fraction of the population not participating in the stocks market. It is equally puzzling that an even larger share of households does not participate in foreign stock markets. Using the Survey of Consumer Finances, this chapter uncovers households characteristics and shows that holders of foreign stocks, when compared to those who only hold domestic ones, are substantially wealthier, more educated, with a different age profile and more sophisticated in their sources of information. I present a model that incorporates information on agents' portfolio allocation decision. Consumers update their portfolio infrequently and to observe its value, pay a cost proportional to the value of their portfolio. Unlike Abel et al. (2007), consumers can invest not only in domestic but also in foreign stocks. In line with the empirical results, agents that invest in foreign stocks update their portfolio more frequently. After calibrating the model to match returns and volatility for the US economy and different foreign stock investments, once agents already invest in domestic stock markets, the minimum cost that would drive investors out of foreign stocks market can be relatively high depending on the model parametrization.;The second chapter, co-authored with Carlos Carvalho, investigates the purchasing power parity (PPP) puzzle in a multi-sector, two-country, sticky-price model. Across sectors, firms differ in the extent of price stickiness, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, this leads sectoral real exchange rates to have heterogeneous dynamics. When calibrated to match the recent microeconomic evidence on the frequency of price changes, in response to monetary disturbances the model produces a half-life of deviations from PPP of 39 months. In contrast, the half-life of such deviations in a counterfactual one-sector version of the world economy is only slightly above one year. The model provides a structural interpretation of the empirical approaches implemented in the literature and reconcile its apparently conflicting results. In addition, we provide a discussion on the cross-sectional implications of the model.;The third and last chapter builds on the previous one and introduces capital accumulation into the multi-sector, two-country, sticky-price model. Capital accumulation facilitates consumption smoothing and hence, can preclude the model from generating high consumption and real exchange rate volatilities. The quantitative analysis shows, however, that the benchmark model with heterogeneity in price stickiness and capital accumulation can match persistence and volatility of real exchange rates, when simulated with a sectoral distribution of price stickiness that matches the microeconomic evidence for the U.S. economy. Notwithstanding, these results depend on the assumptions on monetary policy and on the specifications for capital and labor (homogeneous across sectors or sector-specific), and on the specification for the capital adjustment cost function. |
