Title: Essays in international finance and the history of economic development
Description: The three chapters of this dissertation fall into two distinct research agendas. The first two chapters are in the field of international macroeconomics. They are bound together by a common methodology, which emphasizes the careful modeling of asset markets within contemporary macroeconomic models. The third chapter is a study in economic history, focusing on the economic and political legacies of the Holocaust in Russia. Chapter one shows that the simple fact that economies differ in size has important implications for international asset returns. It uses a standard endowment economy with complete asset markets and non-traded goods to demonstrate that larger countries should have lower real interest rates because their bonds provide insurance against shocks that affect a larger fraction of the world economy. By a similar logic, stocks in the non-traded sector of larger countries also tend to pay lower excess returns. The introduction of a currency union lowers real interest rates and expected returns on stocks in the non-traded sector of participating countries. These predictions are strongly supported by the data.

Chapter two shows that excess volatility in stock returns can drastically reduce welfare even if there is an observed disconnect between the stock market and capital investment. It introduces near-rational investors into a standard neoclassical model of a small open economy. While individual investors suffer only small losses due to small errors in their expectation of future returns, these errors magnify as information aggregates in the economy and result in excess volatility of stock returns. The higher variability of stock returns triggers a rise in risk premia and depresses the steady state level of capital stock and output. Chapter three documents a statistical association between the severity of the mass murder of Jews by the Nazis during World War II and long-run economic and political outcomes within Russia. Areas that experienced the Holocaust most intensely have lower population and GDP per capita today; and they tended to oppose reform during the 1990s. The evidence suggests that these persistent effects of the Holocaust may be due to the shock it represented to the size of the middle class.