Essays in international finance

The first essay presents a model of globalized production in which trade is conducted through discriminatory procurement auctions. In the model, brand owning firms choose suitable producers for their goods out of a worldwide pool of potential suppliers. In the optimal auction suppliers who are adversely affected by an exogenous shock receive a boost, while suppliers who stand to gain from the same shock suffer. Using discrimination in this way; the brand owning firms effectively smooth the effects of shocks across their suppliers, thus limiting the exposure of both their suppliers and their consumers. Therefore in a globalized production environment, stability of import prices and of export profits can go hand in hand. The second essay, written jointly with Efraim Benmelech, is concerned with the direction of causality between short-term debt and vulnerability to financial crisis. We examine the banking sector in five East Asian economies that were affected by the financial crisis of 1997-8. We put together a firm level database that includes information on banks' debt obligations as well as on bank failures. We resolve the causality debate by using certain long-term bonds as instruments: these are bonds that mature during the crisis, but whose issuance is pre-determined. Our results are consistent with an interpretation of short-terra debt as reflecting, rather than causing, distress in the banking sector. However, our findings do not rule out the hypothesis that exposure to roll-over risk contributed to bank failure in the East Asian crisis. In the third essay, written jointly with Kenneth S. Rogoff, we test for changes in price behavior in the longest crude oil price series available (1861-2007). We find strong evidence for changes in persistence and in volatility of price, and relate these findings to industrialization epochs. We then present a modified storage model that fully incorporates demand, and further can accommodate both transitory and permanent shocks. The role of storage when demand is subject to persistent growth shocks is speculative, a finding which helps to account for the increased volatility of oil price in these periods.