Models of International Risk Sharing and Financial Intermediation over the Business Cycle

Chapter 1 revisits prominent puzzles of international economics from the perspective of emerging economies. First, I document four facts that distinguish emerging from industrial economies: 1) the international risk sharing puzzle is more severe in emerging economies; 2) international output and investment correlations are lower in emerging economies; 3) international consumption correlations are low and often negative in emerging economies whereas they are positive in industrial economies; and 4) consumption is more volatile than income in emerging economies. Second, I extend the canonical open economy model to a three-country framework that integrates a small open economy in general equilibrium. The model uses two mechanisms: 1) inelastic trade; and 2) permanent shocks to productivity in the emerging economy, to match the empirical findings.;Chapter 2 studies how financial conditions and real estate prices impinge on the business cycle. I modify the standard real business cycle model with two financial frictions: 1) endogenous balance sheet; and 2) real estate collateral. I estimate the model using Bayesian estimation techniques and find that: 1) Real estate demand and financial shocks combined explain more than half of the variability of most macro and all financial variables; and 2) Technology shocks play a modest role in explaining macro variables and virtually no role in explaining financial variables.;Chapter 3 investigates key features of macro and financial data that have received little attention prior to the Great Contraction (2007-2009), namely: 1) the negative comovement between hours worked and labor productivity; 2) the countercyclical risk premium; 3) the positive comovement of net worth and output; and 4) countercyclical leverage. To explain the observed behavior of these variables I extend the canonical Dynamic New Keynesian model to include two types of financial frictions: 1) endogenous balance sheet; and 2) firm's limited enforcement constraint. The first mechanism explains the comovements of financial variables while the second introduces a `labor wedge' that breaks the tight link between the marginal product of labor and the real wage in a way consistent with the observed labor productivity puzzle.