THREE ESSAYS ON THE INTERACTION OF INTERNATIONAL ASSET AND COMMODITY TRADE
Abstract
The three essays center around economic phenomena which arise out of the interplay between international exchange in assets and commodities. The first essay concerns the two-country growth model with trade in equities and goods developed by Hori and Stein. With free trade in equities and goods, a surplus on the capital account matches a deficit on the current account. It is shown when switches in the creditor-debtor relationship between the countries do and do not occur, thereby correcting an error in earlier expositions. The literature offers two definitions of the richness of a country. We show why for one of these definitions there is no relation between the balance of payments stages and the richness of a country. We also indicate the relationship that exists when the other definition is used. Essay two deals with the phenomenon of currency substitution. We develop a micro choice model describing the individual's demand for goods, bonds and currencies. We show that the optimal combination of the currencies depends solely on the domestic and foreign interest rates. A restriction on bond trade stimulates currency substitution. A short-run macro model is developed to deal with the issue of currency substitution in the aggregate. Under the flexible rate regime, one of the qualitative implications is that inflationary financing in a country liable to currency substitution depreciates its currency more than in a country where no foreign exchange is held. There is a consensus on the fact that fiat money can be useful because it enables individuals to partially overcome frictions inherent to incomplete markets. Less often it is recognized that the function of fiat money is conditional upon the existence of institutions which guarantee its general acceptability. In the third essay we have formalized these aspects of money. The specific institution we model is that of legal tender. This enables us to describe monetized exchange as a cooperative game in which legal tender provides the binding agreement and international specialization constitutes the Nash solution. In the last part a technical problem concerning the value of money in finite economies is solved.
Degree
Ph.D.
Subject Area
Economic theory
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