Essays in International Economics

Abstract

This dissertation consists of two essays in international economics with a focus on the effects of exchange rate fluctuations on an economy through their impact on international capital flows and international trade. The first chapter examines the effect of exchange rate risk in foreign investors' payoff on the informativeness of security prices and home bias in portfolio holdings. I present a model with dispersed private information where foreign investors' payoff differs from domestic investors' payoff because of exchange rate changes. The equilibrium asset price aggregates private information and acts as a public signal about future payoffs. I show that higher private information acquired by foreign investors about their exchange rate adjusted payoff has two opposing effects on the information obtained by domestic investors from the equilibrium price. First, foreign investors' private information increases information about asset payoff in domestic currency, which increases information about domestic investors' payoff in the price. On the other hand, foreign investors' private information increases information about exchange rate changes, which lowers the relative information about domestic investors' payoff in the price. This second effect is higher if exchange rate volatility is high. I find support for the model's implication by using firm-level data (2000-2016) and showing that foreign institutional ownership\footnote{the fraction of common stocks outstanding that is foreign-owned} of firms from higher exchange rate volatility countries is associated with lower price informativeness. The second chapter improves on current treatment of exchange rate variation in quantitative trade models. Exchange rate changes with heterogeneous passthrough to buyers are embedded in the structural gravity model. Quantification on two digit annual bilateral trade data reveals real effects of exchange rate changes on producers that are substantial for some country-sector-time period observations. Real national income effects are small but not always negligible. Effective exchange Rates with Gravitas (ERGs) are introduced as theory-consistent indexes to guide potential policy remedies.