Essays on Macroeconomic Implications of International Capital Flow and Fiscal Uncertainty

Abstract

This dissertation comprises three chapters that contribute to a broader and an ongoing discussion in the macroeconomics, international economics, and development economics literature. Specifically, the first chapter focuses on understanding how shocks to long-term U.S debt held by foreign official institutions such as foreign central banks and foreign ministries of finance affect the U.S economy. In the context of a dynamic stochastic general equilibrium(DSGE) model with imperfect asset substitution between short and long-term government bonds, I find that shocks to long-term U.S debt held by foreign official institutions have expansionary effects on the economy--they lower the long-term interest rate and increase output, consumption and inflation. This result is supported by empirical findings from a structural vector autoregression model (SVAR). The second chapter advances the study of foreign aid fungibility by showing how subtle characteristics of household behavior interact with fungible aid and institutional factors to impact aid effectiveness. Specifically, I build a simple dynamic optimizing model and show that the way consumers internalize an aid induced increase in government spending can have very contrasting impacts on aid effectiveness-- a feature absent in the extensive empirical literature. Finally, the third chapter studies how different discretionary government spending policy options impact the consequences of explosive government transfer payments. I employ a DSGE model with a fiscal limit-- a point where higher taxation is no longer a feasible financing for this study.