Essays on international asset and goods trade.

摘要

Trade costs in the international goods markets are extensively analyzed to explain international macro puzzles, including consumption and equity home bias puzzle, and real exchange rate disconnect puzzle etc. However, this literature ignores the role of financial frictions by assuming complete asset markets. In contrast, the international finance literature focuses on information costs and incompleteness of asset markets. My dissertation research incorporates both financial and goods market frictions in a general equilibrium model, and identifies their significant roles in determining the levels of consumption risk sharing, asset holdings, and goods flows across countries.;The first chapter provides evidence on the significance of financial frictions in explaining the lack of international consumption risk sharing, in addition to goods market frictions. Using the gravity estimation approach developed by Fitzgerald [2007] to measure frictions, this study augments the model to allow for heterogeneous country preferences in a multi-country setting. Consequently, estimating the gravity equation requires a new set of asymmetric importer-exporter dummies. In contrast to earlier studies, results from the likelihood ratio tests reject the null hypothesis of frictionless financial markets within a group of 22 developed countries after controlling for the heterogeneity across country pairs. However, the tests associated with high dimensional gravity equations have a large size distortion (the type I error). Hierarchical Bayesian estimation can control for the large dimensionality of the parameter space and reduces the size distortion. The Bayesian results select the model with both financial and goods market frictions over the model with goods trade costs only. Furthermore, I also find a large home bias in consumption for each country, decreasing trade costs in goods markets, and a negative relationship between the risk sharing level and the volatility of output growth across countries.;The second chapter focuses more on how the hierarchical Bayesian method can help resolve the debate on the choice of different dummy variables in the gravity equation literature. Using panel data on country pairs, there are many ways in which fixed effects may be included in gravity models to control for countries' business cycle properties; estimates of key parameters can vary considerably, as noted in the literature. This chapter tries to answer whether the gravity model estimations should include time-varying or time-invariant dummies, nation or separate importer and exporter dummies, and symmetric or asymmetric pair dummies. These model selection questions cannot be easily answered with conventional likelihood ratio tests and Wald tests because the high dimensionality of the parameter space due to many fixed effects and hundreds of constraints associated with these hypothesis tests lead to a large size distortion (the type I error). Here the hierarchical Bayesian method is applied to reduce the over-parameterization problem and to help choose models more credibly. This study estimates the gravity equations for the Euro Zone effect on trade for 22 developed countries during 1980-2004, a case used previously by Baldwin and Taglioni [2006]. The Bayesian results show that the model with time-invariant importer and exporter dummies is preferred.;Motivated by the positive relationship between bilateral equity holdings and goods trade, the third chapter, coauthored with Huiran Pan, studies the effect of financial frictions on U.S. imports and foreign equity holdings from 2001 to 2008. We evaluate how country spreads and credit constraints on heterogeneous firms determine the relationship between U.S. sectoral imports and equity investments for a group of 44 countries, along with traditional trade costs. Using an IV-Tobit model to control for endogeniety problem and many zero values in the data, we find significant negative effects of financial frictions on U.S. equity holdings and imports. The effects are more prominent for sectors with high financial dependence, high asset tangibility, high short-term debt interest repayment constraint, and countries with high interest spreads. We also find that the distance is more related to the fixed costs instead of the conventional proportional transportation costs. Finally, we support a sector level positive but not universally robust relationship between trade and equity holdings, compared with the pervasively positive relationship in the early literature using aggregate country level data.