In the first chapter of the thesis I develop a model of switching between good and bad policy regimes where transition probabilities are endogenous. A politician chooses a policy regime that affects its own and households' payoffs. Households face a sequence of politicians, observe regime with noise, and decide whether or not to change the government. The decision to switch depends on the expectation of choices of future politicians, which in turn depend on households switching decisions. I characterize equilibria and show how switching probabilities depend on fundamentals (preferences and technology). Model implications about output volatility in a cross-section of countries are supported by the data.
The second chapter of the thesis is co-authored with Jacob Short. We address the puzzle that the developing countries experiencing rapid TFP growth tend to run current account surpluses. This finding is puzzling in the context of the neoclassical growth model, which predicts that these countries should be net borrowers (Gourinchas and Jeanne, 2009). We account for this puzzle by introducing a non-tradable sector to an otherwise standard growth model. We propose that complementarity between tradable and non-tradable goods is key. With an initially underdeveloped non-tradable sector, a representative household is willing to trade a portion of current tradable output in exchange for tradable goods in the future when its production of non-tradable goods increases. A drawback of the simplest version of the model is that faster growing countries experience a reduction in the relative price of non-tradable goods.