Essays in macroeconomics and finance.

Abstract

This thesis proposes two studies that highlight the relevance of financial markets imperfections for aggregate macroeconomic fluctuations and growth. In Part I, I show that financial innovation has increased diversification opportunities and lowered investment costs, but has not reduced the relative cost of active (informed) investment strategies relative to passive (less uninformed) strategies. What are the consequences of this phenomenon? I study an economy with linear production technologies, some more risky than others. Investors can use low quality public information or collect high quality, but costly, private information. Information helps avoiding excessively risky investments. Financial innovation lowers the incentives for private information collection and deteriorates public information: the economy invests more often in excessively risky technologies. This changes the business cycle properties and can reduce welfare by increasing the likelihood of ``liquidation crises". In Part II, I start from the observation that in emerging economies periods of rapid growth and large capital inflows can be followed by sudden stops and financial crises. The chapter, abstracting from business cycles aspects, shows that the process of long run growth can be a key element in accounting for these facts. I study a growth model for a small open economy where decreasing marginal returns to capital appear only after the country has reached a threshold level of development, which is uncertain. Limited enforceability of contracts allows default on international debt. International investors can optimally choose to stop lending when the appearance of decreasing marginal returns slows down the growth of the economy, which then defaults and enters a financial crisis.