Essays in International Macroeconomics

Abstract

The thesis consists of two main chapters. The first one deals with the role bank capital plays in the economy in presence of information frictions. In the chapter I analyze a model with information asymmetry and costly state verification where bank capital allows banks to attract deposits by offering more attractive contracts to consumers. This allows consumers to indirectly access more productive projects and improve their welfare. First, I establish that in an environment where banks have private information about their returns and verifying this information by consumers is costly, the optimal contracts take the form of deposit contracts with bankruptcy. Second, I develop a general equilibrium model with financial intermediation, where bank capital allows banks to offer more attractive contracts that allow them to attract deposits and pursue more productive investment. Third, I demonstrate that if projects operated by banks are sufficiently attractive relative to projects operated directly by consumers, then shifting resources from consumers to bankers, equivalent to recapitalizing banks by taxing the customers, may improve customer welfare. In the second chapter, I am looking at the impact of different national financial regulatory environments on the patterns of financial flows in the banking sector in the Euro Area over the period of 1998-2006. After the creation of the euro, the interbank borrowing market was fully integrated between countries, but lending to firms remained subject to local regulations. The period after the integration was characterized by large capital flows from Northern to Southern countries, with largest from Germany to Spain, which led to a build-up of imbalances on their international investment positions. Spain experienced sizeable economic growth, driven by capital accumulation and accompanied by a large increase in the volume of lending to non-financial firms, and a decline in measured productivity. I argue that the main mechanism driving these patterns was stricter financial regulation in Germany than in Spain. After the euro, German banks used the interbank market to lend to the Spanish ones. I use a two-country international general equilibrium model with heterogeneous firms facing frictional access to borrowing to analyze these patterns. The model is then calibrated for two closed economies, Germany and Spain, to match moments from before the creation of the euro area. After the integration, the model generates capital flows and growth accounting patterns in line with the ones observed in the data, including the deterioration in Spain’s financial investment position, increase in capital/output ratio as well as a slight decrease in measured productivity in Spain.