Theses Doctoral

Essays in International Macroeconomics and International Trade

Jiao, Yang

I study bailout policy in open economies and the relationship between openness and institutions. Chapter 1 studies jointly optimal bailout policy and monetary policy in open economies. I document that countries with larger foreign currency liability/GDP ratio before financial crises underwent larger currency devaluation, inflation and bailout in crises. I build a quantitative open economy model with both nominal rigidities and financial frictions. Using the model, I show that in a world without bailout while currency mismatch effect is present, larger foreign currency liability before crises calls for smaller currency devaluation in crises, embracing the notion of ``fear of floating''. The incorporation of optimal government bailout, whose cost needs to be financed by inflation tax, can overturn the above negative relationship between foreign currency liability and currency devaluation, delivering results consistent with the empirical findings. Finally, I use firm level data to show that whether firms suffer from currency mismatch effect or not during crises hinges on their chance of obtaining bailout. Chapter 2 examines the joint dynamics of private and public external debt for countries. We develop a model with the co-occurrence of banking crisis and sovereign debt crisis in open economies, formalizing Reinhart and Rogoff (2011) findings ``from financial crash to debt crisis". External interest rate spikes or sudden stop shocks force banks to cut down debt position and fire-sale capital. The existence of frictions in bank equity market creates incentives for the government to initiate a bailout. The government bails out banks by increasing external borrowing and implementing fiscal austerity to undo inefficiencies in the private sector. Under optimal bailout scheme, the model generates diverging external debt dynamics for the private sector and the government during a crisis, as we document in the European data. Finally, we investigate two rationales for ex-ante macro-prudential regulations on private external debt: fire-sale externalities between banks and moral hazard by banks.Chapter 3 (joint with Shang-Jin Wei) explores the relationship between openness and institutions. Quality of public institutions has been recognized as a crucial determinant of macroeconomic outcomes. We propose that a country's intrinsic level of openness (due to population size, geography, or exogenous trade opportunities) affects its incentives in investing in better institutions. We present a simple theory and extensive empirical evidence validating the role of intrinsic openness in determining institutional quality. This suggests an indirect but important channel for globalization to improve welfare by raising the quality of institutions.


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More About This Work

Academic Units
Thesis Advisors
Schmitt-Grohe, Stephanie
Wei, Shang-Jin
Ph.D., Columbia University
Published Here
April 13, 2018