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Macro-finance and the open economy

Hui, Xitong (2023) Macro-finance and the open economy. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004571


This thesis studies macro-finance and the open economy. Chapter 1 analyzes whether rising asset prices make savers better off. I study the effect of fundamental drivers of rising asset prices (a fall in time discount rate, an increase in productivity, financial innovation, or a bubble driven by financial frictions) on top welfare inequality between super rich entrepreneurs and savers through leverage. Given the rising asset prices, falling risk-free rates, and rising top wealth inequality observed in the U.S., my theoretical model suggests that the falling time discount rate of the super-rich is the main driver of the trend, and therefore savers are worse off. Chapter 2 investigates sovereign bond safety. Using a continuous-time two-country Lucas tree model with equity constraint, this chapter argues that the country-size effect and the equity-rebalancing effect are the key determinants of sovereign bond safety. Model predictions also reconcile with the empirical facts of flight-to-safety and the covered interest parity (CIP) in both normal and crisis times. Chapter 3 focuses on equity rebalancing. Given the peak of country size of G-10 currency group relative to the US in 2008, the theoretical model accounts for 1) exchange rate risk hedging, 2) equity valuation and diversification 3) US net foreign asset position (NFA) changes, and 4) global wealth transfers, that are consistent with empirical facts, both before and after the Great Financial Crisis. Chapter 4 investigates international diversification. This chapter finds that small countries that are already largely exposed to international risk via trade and investment channel would find it optimal to find refuge in domestic equity and safe assets. Openness strengthens domestic equity and currency while illiquid international equity market weakens them.

Item Type: Thesis (PhD)
Additional Information: © 2023 Xitong Hui
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Sets: Departments > Economics
Supervisor: Reis, Ricardo

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