Essays in International Economics and Macrofinance

Abstract

Economic interdependence increasingly has political implications. At the international level, the tides of global trade and finance are currently shifting, with countries like the U.S. and China increasingly leveraging economic interdependence for political goals (Gopinath, 2023). Within countries, concerns about income and wealth inequality shaping the political landscape have become central to political debates (Piketty, 2014). Although these phenomena operate at different levels, they share a common feature: economic relationships are not merely market outcomes, but are embedded in the political system, within and across borders. This dissertation studies this interplay between economics and politics across and within countries. <br/> To study the interplay between economics and politics, it is often useful to draw on economic history. Many present challenges, such as wars, crises and geopolitical competition are not new, but have recurred throughout the past century. Therefore, this dissertation often draws on newly collected historical data, in combination with modern empirical and theoretical tools, to study these questions systematically. The chapters of this dissertation are self-contained, and each ends with an appendix that collects additional details. <br/> The first chapter, which is joint work with Nicolas Wesseler, studies how countries can leverage economic interdependence for political goals in a geopolitical competition. The international relations literature has categorized the economic tools employed by hegemonic powers into carrots (e.g., foreign aid) and sticks (e.g., tariff threats) (Baldwin, 1985). We develop a model in which two competing hegemons use carrots and sticks to affect the geopolitical alignment of third countries. The model formalizes these concepts and guides our empirical analysis. <br/> To measure the effects of economic tools on geopolitical alignment empirically, we draw on a defining episode of hegemonic competition: The Cold War. We measure the size of carrots, sticks and geopolitical alignment using newly constructed historical data. We digitize declassified data from the CIA to measure the economic and military aid providedby the U.S. and the Soviet Union and leverage a model of international trade to compute the trade dependence of each country on the superpowers, which corresponds to the size of the stick. We estimate the causal effects of carrots and sticks on geopolitical alignment using a shift-share instrument for foreign aid and exogenous variation in trade dependence. We find that geoeconomic tools increase alignment, but obtaining alignment is expensive for hegemons. <br/> We combine the model with the empirical estimates to study the U.S.-China competition and evaluate the potential consequences of a shutdown of USAID. In response, China is predicted to pull back: While the USAID shutdown creates an opportunity for China to step in, the absence of competition ultimately allows China to buy alignment at a lower cost. The world shifts away from the U.S., with initial U.S. allies potentially moving the most. <br/> The second chapter of this dissertation studies modern financial interdependence around the world. The U.S. is the world's largest asset market and occupies a central role in the global financial system (Gourinchas and Rey, 2007). In the past years, the U.S. stock market has become increasingly central in world asset markets, with foreigners now holding more than 20% of U.S. equities. The paper studies the global distribution and implication of the large capital gains the U.S. stock market has generated in the past decade. I construct the global distribution of U.S. asset holdings, carefully accounting for the role of tax havens. The gains foreign countries have made on U.S. external assets are concentrated and large in developed countries, while developing countries have been mostly bypassed. <br/> To assess the welfare implications of these capital gains, I adopt a sufficient statistics approach. In contrast to the large wealth changes, most countries so far did not benefit much in welfare terms. This is because up to now, foreigners have not reacted to these gains and held their portfolios relatively unchanged. <br/> In the third chapter, which is joint work with Luis Bauluz, we turn to domestic distributional questions. This paper examines an understudied aspect of the wealth distribution, the age dimension of wealth inequality. Using historical microdata on household wealth across U.S. cohorts since the 1950's, we document that recent cohorts accumulate more wealth over their life cycle, relative to their income, leading to a widening age-wealth gap. These developments are driven both by rising saving rates at middle ages and by large capital gains on housing and equity. After retirement, we show that the elderly are increasingly dissaving in the face of large capital gains, holding their wealth levels constant. <br/> The macroeconomic effect of these trends is that aggregate wealth and saving are increasingly driven by elderly households, which we analyze by disaggregating the national saving rate across age groups. In terms of welfare inequality, we show that capital gains in equity and housing constituted a welfare transfer from young savers to old asset owners. <br/> The final chapter, which is joint work with Ralph Luetticke, Gernot Müller and Moritz Schularick, combines geopolitics and inequality. We study the impact of interstate wars on the distribution of income and wealth. War is often described as a "Great Leveler" (Scheidel, 2018). However, we show its effects are not uniform across income and wealth. Using historical data, we show that wars on a country's soil lower top-1% income shares by more than 20%, while top-1% wealth shares fall by only about 10%. <br/> We combine the historical evidence with a heterogeneous agent New Keynesian (HANK) model to study the underlying mechanisms suggested by the historical literature, destruction, taxation and inflation. The main force behind the leveling and its effects across income and wealth is destruction, which squeezes profit income at the very top but leaves relative wealth inequality less affected. We validate this mechanism in new data on inequality across German towns and cross-country data on firm profits.