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Essays on macro and international finance

Kösem, Sevim (2019) Essays on macro and international finance. PhD thesis, The London School of Economics and Political Science (LSE).

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Abstract

This thesis consists of three chapters. The first two chapters study the macroeconomic and financial stability implications of income inequality and discuss how a low interest rate environment can alter its consequences. The third chapter studies how macroeconomic and financial instability can arise from foreign shocks in the presence of global banks. Chapter 1 presents an analytical model of mortgage and housing markets. The framework departs from standard lending models with exogenous lending constraints by incorporating collateral into a rational default model. The model predicts that following an increase in income inequality house prices decline and aggregate default risk rises in equilibrium. I then show that low real rates mitigate the depressing effect of inequality on house prices at the cost of amplifying aggregate default risk in the mortgage market. Chapter 2 studies how income inequality is associated with house prices, mortgage debt and mortgage delinquency using panel data of US states. In order to isolate the effect of income inequality from that of the declining real rates, I use year fixed effects in the specifications, in addition to state fixed effects and covariates that vary both by year and state. I find that the data verifies the predictions of the theoretical framework presented in Chapter 1 of this thesis. Chapter 3 analyses the role of global banks in international transmission of shocks when countries have different domestic financial market structures. In particular, (i) bank capital requirements and (ii) firm borrowing constraints are different across countries. I show that a financial shock might give rise to a global decline in real output if the shock originates in the country with loose firm borrowing constraints. Moreover, tight borrowing constraints and high bank capital requirements are associated with limited economic contraction and fast recovery following a financial shock, independent of its origin.

Item Type: Thesis (PhD)
Additional Information: © 2019 Sevim Kösem
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Economics
Supervisor: Ilzetzki, Ethan
URI: http://etheses.lse.ac.uk/id/eprint/4067

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