This dissertation contributes to the growing literature of international finance on capital market integration and consumption risk sharing in emerging economies. I identify threshold effects in terms of financial market integration to demarcate regimes with varying extent of international risk sharing in emerging economies. In Chapter 2, I study a model of a small open economy to see how default decisions affect incentives for international consumption risk-sharing based on varying levels of debt to capital ratio in emerging economies while in Chapter 3, I employ a novel endogenous threshold identification method developed by Hansen (1999) for balanced panels, to empirically identify threshold effects of capital market integration on consumption risk-sharing in emerging economies. Finally in Chapter 4, I study the determinants of the capital market integration via level and composition of foreign assets held by emerging economies, exploiting temporal and cross-sectional variation in a panel data set of 37 emerging economies from 1970 - 2007.

This paper estimates an empirical nonstationary panel regression model that tests long-run consumption risk sharing across a sample of OECD and emerging market (EM) countries. This is in contrast to the existing literature on consumption risk sharing, which is mainly about risks at business cycle frequency. Since our methodology focuses on identifying cointegrating relationships while allowing for arbitrary short-run dynamics, we can obtain a consistent estimate of long-run risk sharing while disregarding any short-run nuisance factors. Our results show that long-run risk sharing in OECD countries increased more than that in EM countries during the past two decades.

Abstract: The first chapter investigates the effects of inflation, accessibility and depth of credit markets on wealth distribution. We find that from 1995 to 2002 in China, the inequality of wealth distribution decreased, the money-wealth ratio increased for all wealth levels and the aggregate money-output ratio increased. We develop a two-asset dynamic general equilibrium model in which households face a portfolio-adjustment cost and a borrowing constraint. The accessibility and depth are measured by the portfolio-adjustment cost and the borrowing constraint, respectively. Model calibration based on the Chinese data shows that the portfolio-adjustment cost was reduced and the borrowing constraint was relaxed from 1995 to 2002. We find that financial development lowers the inequality of wealth distribution by reducing the precautionary motive of households. In addition, tight monetary policy increases the value of money and, in turn, raises the money-wealth ratio for all wealth levels and the aggregate money-output ratio. The second chapter examines inter-provincial consumption risk sharing and intertemporal consumption smoothing across Chinese provinces before and after the 1979 economic reform. Our results indicate that the degree of consumption risk sharing among Chinese provinces is lower than that within the U.S. and across the national boundaries of OECD countries. On the other hand, the level of consumption smoothing among Chinese provinces is higher than that across OECD or EU countries, but lower than that in the U.S. Moreover, our results show that consumption risk sharing and smoothing in China have deteriorated since the 1979 economic reform. Finally, we show that eliminating consumption fluctuations yields substantial welfare gains, which suggests that stabilization policies are desirable for China. The third chapter compares continuous and discrete time sticky price models. For given menu costs, continuous time models imply shorter average contracts but larger real effects of inflation.

The objective of the first chapter is to investigate the degree of consumption risk-sharing within Japan, and to evaluate various explanations for the level of intra-national risk-sharing that are not previously examined. I find the evidence of much larger degree of consumption risk sharing within Japan than that between countries. The model is extended to include the assumptions of (a) non-separability in the utility function between consumption and leisure, (b) the prefecture specific effects, and (c) the disaggregated consumption. Once the prefecture specific effects are controlled for, the income effect on consumption is further reduced. I next investigate the amount of risk sharing within various subgroups of Japanese prefectures. Interestingly, I find that the subgroup of rich or fast growing prefectures is the most vulnerable to the idiosyncratic income effects. Furthermore, when the analysis is applied to the subgroup of geographically close regions, the strong evidence for full consumption risk sharing is detected for some regions. The second chapter examines the determinants of FDI from U.S. and Japan in China using the provincial data set from 1991 to 1997. The results of the regression analyses are further compared to those of the aggregated FDI as a benchmark case. The study found various similarities and differences in the importance and the magnitudes of the determinants of FDI among three FDI sources. It is shown that both absolute level of GDP and the lagged GDP significantly affects inflow of FDI from all sources. The hypothesis that the good quality of infrastructure is conductive to attract FDI is strongly supported for all FDI sources, although the magnitude of the impact of the variable varies. The policy variables are also found to have significant positive effects on FDL The labor quality exerts larger influence on Japanese FDI than on U.S. FDI, which may reflect the different structure for coordinating activities between U.S. and Japanese firms. The results for the wage variables are inconclusive. The study also shows the marginal support for the positive effect of cultural proximity between Japanese FDI and the provinces of Manchuria.