The Project
Within and across countries heterogeneity in International finance
Financial globalization has led to a surge in cross-border capital flows, a large increase in countries gross foreign asset and liability positions, together with increasing global imbalances. Understanding how private investors structure their international portfolios and how such financial decisions interact with the real side of the economy has recently become a critical macro policy issue. This is especially true in the context of the recent financial crisis where policy makers and academics have even been advocating the understanding of international capital flows and current account imbalances in the US and within European countries as a necessary step to analyze the roots of the crisis and its international transmission. Another important recent evolution is the larger role played by large and fast growing emerging markets in the global economy. The world is getting more asymmetric as these countries feature very different characteristics (institutional, demographics, or in terms of policies conducted to name a few) compared to developed countries.
INFINHET aims at developing new dynamic multi-country macro-models to better account for the heterogeneity across agents and across countries in order to answer age-old questions in international macro such as the benefits from financial integration, the emergence and adjustment of external global imbalances, the joint dynamics of exchange rates and asset prices, the international transmission of shocks through financial linkages, the international dimension of fiscal policies in open economies.
The two parts of the project
INFINHET has two main components. The first part develops new numerical methods to solve for multi-country dynamic stochastic models with heterogeneous agents and/or countries, a necessary step to better incorporate risk in such models. This will allow me to study the dynamic of capital flows and asset prices at business cycle frequencies and in crisis time. Policy questions regarding the benefits of financial integration and capital taxation in a globalized world will also be revisited. The second part focuses on more long-term issues in multi-country dynamic overlapping generations growth models. It analyzes the importance of asymmetries across countries on macroeconomic outcomes, thus in an integrated capital market. Besides differences in growth patterns and demographic evolutions, I plan to investigate the role of differences in financial institutions, insurance mechanisms and welfare states. Each theoretical contribution of the project will call for empirical investigation, either based on variation across asymmetric countries or across agents within countries. This will require the development of new panel data based on cross-country aggregate data as well as the use of micro data based on individuals.
Funding
This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no. 336748.
