UC Santa Cruz

This dissertation studies topics of international economics, such as the long-run relationship between international capital flows and economic growth, the gravity of consumption risk sharing between countries, and the spacial consumption risk sharing across 50 states in the United States. Each chapter of the dissertation approaches one of these three topics.The first chapter examines the long-run patterns of net private and public capital inflows empirically and theoretically. Using data for 83 developing countries over the sample period 1980--2019, the empirical results show a robust positive correlation between net private capital inflows and GDP per capita growth and a robust negative correlation between net public capital inflows and economic growth. Further, this paper finds that the patterns of private and public capital flows remain when human capital is controlled in the regression model. Based on these findings, I provide a theoretical framework that explains the long-run joint behavior of private and public capital flows in a small open economy. In the balanced growth model, the benevolent government spends money on human capital investment, which is the key source of growth. The government increases its expenditure to sustain a higher balanced growth rate, which leads to an increase in public savings in the international reserve accumulation. The second chapter studies how frictions in bilateral economic linkages shape the consumption pattern across economies. Using state-level data from the US, we find that the degree of bilateral consumption risk sharing across states decreases in geographic distance. To explain this novel fact, we develop a DSGE model that incorporates trade, migration, and finance as channels of risk sharing which are subject to frictions that covary with distance. Calibrated to the US data, the model not only enables us to quantify the magnitude of the frictions in each channel, but also allows us to examine the interplay among the channels and disentangle their effects on the level, volatility, and comovement of consumption across states. Counterfactual analyses based on the model provide guidance for the design of macroeconomic policies that aim to reduce cross-region consumption disparity. The third chapter presents new evidence that trade costs impede cross-country consumption risk sharing. Our analysis exploits cross-sectional and time-series variations in trade costs across country pairs. Using the data for a large panel of countries over the period 1970--2014, we find that bilateral risk sharing improves once a pair of countries become partners under a regional trade agreement. Moreover, we establish a gravity model of consumption risk sharing by finding that countries that are more geographically distant from each other exhibit weaker bilateral risk sharing. The effect is more pronounced in the absence of RTAs, which suggests that trade-promoting policies mitigate the impact of geographic distance on risk sharing. Furthermore, we build a causal relationship between trade and risk sharing by using instrumental variables. These results point to the importance of the trade channel for international consumption risk sharing. Based on these findings, lifting trade barriers will benefit countries by reducing consumption fluctuations.