Date of Award

Summer 8-12-2011

Degree Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Graduate Group

Economics

First Advisor

Dirk Krueger

Second Advisor

Harold Cole

Third Advisor

Urban Jermann

Abstract

This dissertation uses quantitative dynamic models to study two separate questions in international finance and international labor markets.

In Chapter 2, we build a two-country two-good incomplete markets general equilibrium model of international portfolio choice, and use it to study global imbalances, in particular the large negative net foreign asset position, and international portfolio composition of the United States. We show that the ``exorbitant privilege'' of the US (ability to borrow in domestic currency) and lower volatility of macroeconomic shocks that the US has experienced since mid-80s can account for a large part of the negative net foreign position of the US, and also generate a realistic portfolio structure.

In Chapter 3, we study the differences in labor supply between the US and Europe. Using micro data from the US and eight European countries, we document that the difference between the US and Europe is mainly driven by the labor supply of women.European women work less than American women, whether it is single women, married women, or women with and without children. Using a larger number of countries, we also document that there is a strong correlation between divorce rates and female employment rates across countries and across time. A recent literature, including Prescott (2004) and Rogerson (2005), argues that differences in labor supply between the US and Europe can largely be explained by differences in tax rates. We use tax data from the OECD to develop tax schedules for a sample of 17 countries. The empirical correlation between hours worked and different measures of tax levels and progressivity is negative, however weak. Motivated by these observations, we develop a life-cycle model with heterogeneous agents, marriage and divorce and use it to study the impact of two mechanisms: 1) differences in marriage stability and 2) differences in tax systems on labor supply. There are three types of households; single males, single females and married households. Divorces and marriages occur stochastically. The main channel through which individual divorce and singlehood rates impact labor supply is by reducing the implicit insurance of marriage, and thereby providing incentives for individuals to invest in experience. We calibrate our model to US data and study how labor supply in the US changes as we introduce European tax systems, and as we replace the US divorce and marriage rates with their European equivalents. We find that the divorce and tax mechanisms combined on average explain 28% of the difference between the US and 11 European countries.

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