Essays in International Macroeconomics

Abstract

This dissertation consists of three chapters. In the first chapter, I study trends in FDI in emerging economies. I document that 1) China has greater inward FDI stock, and India has lower inward FDI stock relative to Mexico; 2) the inward FDI stock in India is converging to the Mexican stock level; 3) the inward FDI stock in India relative to that in China converges toa value that is less than one, in other words, the inward FDI stock in India will not overtake that in China. I build a model of capital flow across countries that incorporates agglomeration and dispersion effect. Agglomeration effect makes capital more productive as its level rises. Dispersion effect makes capital more production when population (labor supply) is higher. Using the model, I show that higher population (lower dispersion) in China dominating agglomeration affect in Mexico results in large inflow of FDI in China relative to Mexico. Similarly, India will catch up with Mexico due to its high population (low dispersion). However, the inward FDI stock in India relative to China remains low because higher agglomeration effect in China dominates lower dispersion effect in India. In the second chapter, I document 1) higher initial inward FDI stock in Brazil, and 2) lower dispersion (higher population) in Brazil relative to Mexico. However, over time Mexico catches up with Brazil. I explain this contradictory data with intermediate inputs in production process. Third chapter documents positive correlation between employment and reserve-gdp ratio. To explain the mechanism behind the positive correlation, I build a dynamic stochastic model that features reserve accumulation by the government, and foreign intermediaries that are subject to capital control and financial friction. Following mechanism is then proposed. The reserve accumulation by the government is sterilized by issuing debt in the domestic financial market. The increase in government debt crowds out household borrowing. The reduced household borrowing increases employment due to income effect. The model is calibrated using Mexican data. To establish the validity of the mechanism I show that the correlation between reserve and employment, and reserve and household saving in the calibrated model and data are of the same sign.