Disaggregated Perspectives On Emerging Market Financial Flows And Integration

Abstract

This dissertation addresses questions relating to the real economic impact of international financial flows and integration on emerging market economies. Chapter 1 studies emerging markets' corporate liquidity policies in response to financial constraints and uncertainty in global capital markets. I develop a simple model that shows the importance of these two factors in motivating emerging market firms to accumulate internal funds in the form of cash. Using firm and issuance-level data, I find evidence consistent with this hypothesis. I consider the context of these economies' widespread capital flow booms and busts surrounding the global financial crisis of 2008-09. More constrained firms held more cash on average, but they had weaker ability to accumulate cash during the post-crisis period. Furthermore, I show that cash improved foreign-financing-constrained firms' resilience, as those that held more cash prior to the crisis maintained higher levels of investment after the crisis started. Lastly, firms in countries with higher capital flows volatility during the postcrisis period accumulated more cash. This paper highlights a previously-ignored dimension in international economic policy: corporate internal funds impact the vulnerability of firms to capital-flows-generated supply shocks. Chapter 2 investigates the effects of capital account liberalization on wage inequality in emerging markets. I first develop a two-country general equilibrium model, which predicts that wages would rise across all sectors after an emerging market liberalizes its capital account. However, due to sector-level differences in marginal labor productivity, wages increase more in the sector with higher skill intensity. I then use industry-level panel data across sixty-eight emerging markets to evaluate this model. Consistent with the predictions of the model, financial liberalization boosts real wages across all sectors but this increase is disproportionately higher for more skill-intensive sectors, suggesting a rise in wage inequality. Chapter 3 examines the effects of surges and stops in gross capital inflows on emerging market corporate investment at the firm level. While surges and stops do transmit to the real economy in the form of higher and lower physical investment, respectively, this effect is not symmetric. The increase in investment during surge periods is larger in magnitude than the decrease in investment posed by stop episodes. The investment decline during stop episodes is concentrated among financially constrained firms. No such concentrated effect was observed during surge periods. Financial openness affects the magnitude of investment declines during stop episodes but plays no additional role in affecting financially constrained firms, suggesting that the source of emerging market firm financial constraints arises from micro-structural factors. ii