When Finance Meets Trade: Three Essays in International Economics

by Chenyue Hu

Institution: University of Michigan
Year: 2016
Keywords: International Capital Mobility; Trade; Economics; Business and Economics
Posted: 02/05/2017
Record ID: 2064254
Full text PDF: http://hdl.handle.net/2027.42/133399


This dissertation examines international capital mobility, focusing on equity and debt markets. I not only study the determinants and patterns observed in capital markets, but also investigate how capital flows affect and are affected by trade. The first chapter “Productivity matters: a new angle on equity home bias” examines the effect of countries' industrial structure on global portfolio diversification. Results indicate that sectoral home bias is stronger in unproductive sectors where investors face fewer risks than in productive sectors. Furthermore, national home bias is stronger in the countries with diversified industrial structures because intra-national risk hedging across industries replaces the need for inter-national risk hedging across countries. In the second chapter “Optimal trade policies after sovereign defaults,” my coauthor and I offer new theoretical and empirical insights into the effect of sovereign defaults on trade. Empirical evidence from the changes in trade shares after debt renegotiations as well as Aid-for-trade statistics indicates that sovereign debt renegotiation is not associated with trade sanctions. Using a two-country DSGE model with incomplete financial markets, we are able to explain why trade sanctions are not observed. Our model departs from the existing literature on sovereign defaults by building on the strategic interaction between debtors and creditors. We solve the model numerically to determine the optimal trade costs given different combinations of debt and income levels. The third chapter “Does debt structure matter? Financial constraints and trade revisited” examines the implications of firms' heterogeneous debt structure for international trade. Small firms rely heavily on bank loans while big firms have access to corporate bonds. I model this as a nonlinear financial constraint which places disproportional burden on small firms which further limits their production and ability to export. An empirical analysis based on the model complements previous work in examining the degree to which financial constraints impede trade. Advisors/Committee Members: Dominguez, Kathryn Mary (committee member), Deardorff, Alan V (committee member), Nagel, Stefan (committee member), Cravino, Javier (committee member).