Essays on incomplete markets and international business cycles

The collapse of the Bretton Woods monetary system in the late 1970s has resulted in a significant increase in international capital flows between the industrialized countries. However, removal of formal barriers to capital movements has not yet resulted in perfectly functioning international capital markets. The thesis focuses on investigating the linkages between international capital flows and domestic labour markets which still remain constrained in terms of mobility.; Firstly, this thesis analyzes the role of international redistributive transfers in the environment where international capital markets are endogenously incomplete and individual countries are not able to attract sufficient private capital due to risks associated with default. It is shown that the redistributive transfers reduce incentives for recipient countries to default on private debt obligations, thus facilitating an increase in international private capital flows to that country.; Secondly, this thesis considers the long-run (steady-state) implications of capital mobility on unemployment levels and international indebtedness in the presence of different unemployment benefit structures. It is shown that the differences in the generosity of unemployment benefits lead to larger differences in unemployment rates across countries. Moreover, when capital markets are opened, high benefit countries experience both an increase in the unemployment rate and an outflow of capital, and low benefit countries experience both a reduction in the unemployment rate and an inflow of capital. The result helps to explain the unemployment gap between the United States and Europe that widened dramatically in the mid-1980's. This time period was also characterized by substantial increases in international capital flows---a significant share of which were flows from Europe to the United States.; Thirdly, this thesis analyzes the transitional dynamics resulting from the opening of international capital markets and the cyclical properties of key labour market variables. It is shown that the removal of capital barriers results in a significant increases in volatilities of unemployment and output. A two-country labour search model is used to replicate standard features of international real business cycles.