Essays on Networks and Behaviors in International Macroeconomics

Abstract

This dissertation provides new analytical frameworks of network and behavioral theories in order to answer real-world economic questions where more simplified traditional models have struggled to explain. In Chapter 1, I provide a theory of international portfolio investments where international investors have heterogeneous consumption preferences and goods are produced in a global production network. While traditional two-country models can only explain the asset allocation between domestic and foreign assets, my theory explains also the composition of external investments, i.e. how investors should optimally allocate their investments between multiple foreign destinations. I solve in closed form for the optimal equity and bond portfolio investments in a workhorse multi-country real business cycle model and show in Chapter 2 that the network-theory implied portfolio has empirical explanatory power for the actual portfolio holding patterns observed in the data. In Chapter 3, I provide a behavioral-based explanation of two recent macroeconomic puzzles: (i) the anchoring of inflation and (ii) the flattening of the Phillips Curve. In particular, I introduce endogenous behavioral inattention into the standard New Keynesian model and derive a new Phillips Curve, called the Behavioral-Attention Phillips Curve (BAPC). The BAPC has both an output-gap slope and inflation-expectation slope that decline with inflation uncertainty in the economy. Using data from the Michigan Surveys of Consumers, I estimate the BAPC and show that it provides a better in-sample and out-of-sample fit of the US inflation dynamics since 1978 than traditional versions.