Chapter 1 provides a fully-fledged 2-country model to quantitatively explain the pattern of two-way capital flows between emerging economies and the developed world. Despite multiple heterogeneities in households and firms with incomplete markets and capital accumulation, our infinite-horizon model is analytically tractable with closed form solutions at the micro level, which permits exact aggregation by the law of large numbers. Our model yields three implications that stand in sharp contrast with the existing literature: (i) Global trade imbalances between emerging economies and the developed world are sustainable even in the steady state. (ii) FDI can be beneficial for the sourcing country but harmful to the recipient country under financial frictions. (iii) The "saving glut"...[ Read more ]

Chapter 1 provides a fully-fledged 2-country model to quantitatively explain the pattern of two-way capital flows between emerging economies and the developed world. Despite multiple heterogeneities in households and firms with incomplete markets and capital accumulation, our infinite-horizon model is analytically tractable with closed form solutions at the micro level, which permits exact aggregation by the law of large numbers. Our model yields three implications that stand in sharp contrast with the existing literature: (i) Global trade imbalances between emerging economies and the developed world are sustainable even in the steady state. (ii) FDI can be beneficial for the sourcing country but harmful to the recipient country under financial frictions. (iii) The "saving glut" of emerging economies is not responsible for the low U.S. or world interest rate.

Chapter 2 presents an estimated DSGE model of stock market bubbles and business cycles using Bayesian methods. Bubbles emerge through a positive feedback loop mechanism supported by self-fulfilling beliefs. We identify a sentiment shock which drives the movements of bubbles and is transmitted to the real economy through endogenous credit constraints. This shock explains more than 96 percent of the stock market volatility and about 25 to 45 percent of the variations in investment and output. It generates the comovements between stock prices and macroeconomic quantities and is the dominant force in driving the internet bubbles and the Great Recession.

Chapter 3 estimates a DSGE model with (S,s) inventory policies. We find that (i) taking inventories into account can significantly improve the empirical fit of DSGE models in matching the standard business-cycle moments; (ii) (S,s) inventory policies can significantly amplify aggregate output fluctuations; and (iii) aggregate demand shocks become more important than technology shocks in explaining the business cycle. An independent contribution of this chapter is that we develop a solution method for analytically solving (S,s) inventory policies in general-equilibrium models with heterogeneous firms and multiple frictions.