Essays on international finance

This dissertation contains four chapters (essays) which address the current research topics in the field of international finance. Chapter 1 and chapter 2 both deal with the international debt problem, however each focuses on different aspects of the issue. Chapter 1 combines the literature of assets trading, pricing, and that of international lending with default risk together to set up a two country-model of international lending with default motivation and intervention behavior. To study the international debt problem, Chapter 1 adopts the methodology developed by Dumas(1986) and the optimal stopping technique (see Krylov(1980)). It demonstrates that given a set of exogenous parameters, the interest rate and the default premium, as well as investment and consumption strategy, can then be endogenously determined. Chapter 2 sets up a two-period principal-agent model with two goods, traded and non-traded, with emphasis on the form of payment. It deals with the issue of inability to pay and unwillingness to pay in a unified framework. It points out that in the two-period models, the role of reputation is equivalent to the reduction of interest rate of the first period loan. This reduction is not uniform, but is contingent upon the internal and external situations. Chapter 3 studies the switching model of discrete time dynamic programming. This model is applied to deal with the issue of exchange rate pass through. Based upon the assumption of the sunk cost and the exchange rate following a Markov process, it develops a discrete time model to explain the phenomenon hysteresis . Both a single-firm model and a simple industry equilibrium model are studied. Chapter 4 is a step towards a theory of endogenous deviations from the Purchasing-Power-Parity (PPP). The deviation from PPP studied in this paper is purely caused by the difference in consumption preferences. This chapter defines a stochastic equilibrium condition where there is capital flow and goods trading in a continuous time model, and shows that if there is lending and borrowing in the capital market, then the price of the goods as well as interest rate should be a function of the wealth allocated between countries