The paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country's net exports or net foreign asset position have to be matched either by future net export growth (trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the ratio of net exports to net foreign assets predicts an annualized 4% depreciation of the exchange rate over the next quarter.

This dissertation consists of three essays that aim to provide a deeper understanding of the consequences of financial globalization and macroeconomic fluctuations—for banks, firms, and households—by analyzing both micro-foundations and macroeconomic implications.

The first chapter studies how globalization of banking systems has affected credit allocation and the macroeconomy. I provide a new theory of credit allocation in financial systems with both global and local banks, and tests it using cross-country loan-level data. I first point out that the traditional theory in banking and corporate finance of firm-bank sorting based on hard versus soft information does not explain the sorting patterns between firms and global versus local banks. In light of this puzzle, I propose a new perspective: global banks have a comparative advantage in extracting global information, and local banks have a comparative advantage in extracting local information. I formalize this view in a model in which firms have returns dependent on global and local risk factors, and each bank type can observe only one component of the firms’ returns. This double information asymmetry creates a segmented credit market with a double adverse selection problem: in equilibrium, each bank lends to the worst type of firms in terms of the unobserved risk factors. Moreover, I show that the adverse selection problem has important macroeconomic implications. When one of the bank types faces a funding shock, the adverse selection affects credit allocation at both the extensive and intensive margins, generating spillover and amplification effects through adverse interest rates. I formally test the model using detailed firm-bank micro data and empirical strategies that tightly map to the model set-up. I find firm-bank sorting patterns, and effects of US and Euro area monetary policy shocks on credit allocation, that support the model predictions. This evidence reveals a novel adverse selection channel of international monetary policy transmission.

The second essay studies the long-run implications of financial crises and macroeconomic shocks on consumption behavior. We show that personal lifetime experiences can “scar” consumption. Consumers who have lived through times of high unemployment have persistent pessimistic beliefs about their future financial situation, though their actual future income is uncorrelated with past experiences. Nevertheless worse lifetime experiences predict significantly reduced consumption spending, controlling for income, wealth, demographics, and time effects. As a result of their experience-induced frugality, scarred consumers also build up more wealth. The results are robust to a battery of variations in the liquid- and illiquid wealth and income controls in the PSID, and replication in the Nielsen Homescan Panel and the CEX. Scarred consumers use more coupons and purchase more sale items and lower-end products. We use the stochastic life-cycle model of Low et al. (2010) to show that the estimated negative relationship between experiences and consumption cannot be generated by financial constraints, income scarring, or unemployment scarring, but is consistent with experience-based learning. As predicted by experience-based learning, the estimated effects of a macro shock are stronger for younger cohorts. The results suggest a novel micro-foundation of fluctuations in aggregate demand, and imply long-run effects of macroeconomic shocks.

The third chapter studies the impact of capital inflows on the real economy in the context of a “China shock” in the US real estate market. We document an unprecedented surge in housing purchases by foreign Chinese in the US over the past decade and estimates its effect on US local economies. Using transaction-level data on housing purchases, we find that the share of purchases by foreign Chinese in the California real estate market increased almost twentyfold during the period of 2007-2013. In particular, these purchases have been concentrated in zip codes that are historically populated by ethnic Chinese, making up for more than 10% of the total real estate transactions in these neighborhoods in 2013. We exploit the cross-sectional variation in the concen- tration of Chinese population settlement across zip codes during the pre-sample period to instrument for housing transactions by foreign Chinese. The results show that the surge in capital inflow from China into the US real estate market significantly increases local housing prices and local employment. We present evidence showing that this effect is primarily driven by a housing net worth channel. The evidence highlights the role of foreign capital inflow on the local real economy, especially in times of economic downturns.

This dissertation investigates a number of topics in international finance and macroeconomics, with a particular emphasis on using and adapting tools from asset pricing to this context. Chapter 1, co-authored with Pierre-Olivier Gourinchas and Hélène Rey, starts by providing an overview of the structure of the international monetary and financial system. Chapter 2 zooms in on a specific and long-standing open issue that has received a lot of attention in the international finance literature: the international portfolio choice problem, which is concerned with how investors allocate their portfolio internationally. Despite this attention, the literature has only provided limited answers to this problem in terms of resolution methods and the generality of preferences, an issue that I aim to alleviate in this Chapter. Because of its generality, the framework of Chapter 2 lends itself to several applications and extensions. Chapter 3 focuses on one main application, in which I show that the model can reproduce a number of stylized facts about the structure and dynamics of the international financial system, and in particular the role of the United States, and of asset returns in this context. Finally, Chapter 4, co-authored with Pierre-Olivier Gourinchas and Hélène Rey, focuses on the secular decline in global real interest rates, another key theme in international finance and macroeconomics. We suggest that the world real rate of interest is likely to remain low or negative for an extended period of time, and discuss a number of possible explanations, an important one being the process of deleveraging of the balance sheets of investors.

Standard analysis of consumer behavior uses theory and evidence on quantities and prices to measure consumer welfare, particularly through the use of price indexes that capture the cost-of-living. In three essays I go beyond this standard analysis to analyze the impact of household variety, store variety, and energy requirements on food demand, consumption patterns and consumer welfare, with implications for several important topics in development and international economics.

In the first essay I develop theoretical and empirical tools for analyzing variety-seeking behavior by households in a non-homothetic setting, showing how changes in the slope and intercept of ``variety Engel curves'' map into the level and distribution of consumer welfare in a way that is not captured by standard analysis. The ``cost'' of variety is introduced as an important concept for analysis that is distinct from price, e.g. the ``cost'' of quantity. The application to Indian food consumption indicates that increases in food variety over time and greater urban food variety are not attributable solely to income growth, with significant implications for both the size and distribution of welfare gains from variety.

In the second essay, co-authored with Shari Eli, we continue to explore empirical patterns in Indian food consumption and draw attention to the decline in calorie intake at all expenditure levels. Once again the Engel curve is used as a guiding framework for the empirical analysis and once again there are changes in consumption patterns that are not explained by movements in prices and income alone. In this case the ``cost'' of calories is represented by the role of calories (as opposed to other food attributes) in satisfying household caloric requirements. Using data on time-use to impute caloric requirements and combining this with data on ownership of labor-saving durables, we find support for the hypothesis that a decline in energy requirements has had an important impact on variation in calorie intake over time and space, explaining most of the rural-urban discrepancy in calorie intake but only a modest share of the decline in calorie intake over time.

In the third essay I examine product variety from the point of view of retailers rather than consumers, showing that differences in variety across different stores of a North American grocery retailer have large impacts on consumer welfare. I argue that these differences in variety can be largely attributed to differences in store size and international borders, and provide a stylized partial equilibrium model to analyze what factors influence the retailer's choice of store size in different locations. I find empirical support for the predictions of the model, with larger markets (higher income per capita, higher population density) leading to larger store size and variety while greater competition reduces store size and variety, with significant impacts on consumer welfare across different geographic areas.

In Chapter 1, I develop a New Keynesian model with inventories and convex costs of labor adjustment. For each of the three empirically observed responses to monetary policy shocks: (1) the slow adjustment of inventories compared to changes in sales; (2) the delayed and gradual response of inflation; and (3) the transitory movement in the aggregate price level in the same direction as the interest rate, also known as the "price puzzle," my model has important implications. First, adjustment costs counteract the financing-cost effect of interest rate changes on inventory holdings, but are still inadequate for the calibrated model to generate countercyclical inventory-to-sales ratios. I find that this financing-cost effect needs to be reduced by 80 percent for the model to predict inventory behavior correctly. Second, firm-specific adjustment costs in production increase the degree of real rigidity for price adjustment, so the response of inflation in the presence of high aggregate marginal costs is still slow-moving and persistent. Finally, the motive of cost smoothing for holding inventories implies that marginal costs should move in the opposite direction as the interest rate, which casts doubt on the use of the cost channel to explain the "price puzzle."

In Chapter 2, I propose a theory of the information channel between home consumption bias and home equity bias. Consumption-revealed information is acquired spontaneously in an investor's daily life and thus is naturally immobile. For this reason, consumption experience more concentrated in home-produced goods endows domestic residents with information advantage in home equities. This channel also helps to explain many empirical facts such as the 90\% correlation between import shares and foreign equity shares.

In Chapter 3, I use individual portfolio data from a China's brokerage firm to test the predictions of Chapter 2. I find that the fraction of local stocks in the brokerage portfolio is 143 percent higher than the fraction of local stocks in the market portfolio. One third of this portfolio locality is explained by business exposure of listed firms, measured by their sales per capita in the brokerage city. The result shows that a rise in sales per capita by \$2.75 leads to a 32 percent increase in the portfolio share relative to the mean. To examine whether business exposure helps investors to gain information other than familiarity, several indicators of business exposure in nonlocal areas are included in a regression. The result suggests that if a nonlocal firm's business is concentrated in other areas, local investors tend to shy away from its stock. However, some coefficients are not statistically significant, so we still cannot reach the conclusion that a firm's sales business has significant amount of information content on stock returns.

This dissertation examines the role of financial institutions as they relate to foreign currency payments and financial stability. The first chapter of this dissertation examines how the foreign currency component of international payments can be costly for importers and exporters by studying the introduction of a payments system between Brazil and Argentina established in 2008. The second chapter of this dissertation examines the reasons behind short-term funding vulnerabilities of financial institutions by studying Building and Loan Associations in California during the Great Depression. Finally, the last chapter of this dissertation studies the COVID-19 pandemic, which is one of the most important public health and economic events of recent history. This chapter studies the effect of stay-at-home orders, enacted to combat the spread of COVID-19, on local labor markets.