In four essays, this dissertation examines issues in macroeconomics and stabilization, international lending decisions, banking crises and the interrelation between financial development and growth. Essay One studies stabilization and the dynamics of inflation if monetary policy is transparent only to part of the population. Because of tradeoffs between speed of adjustment and long-run inflation, central banks prefer a higher proportion of agents who form informed expectations in high inflation periods but not so in lower inflation periods. Survey data on expectations of inflation from Bulgaria is used to test for influences on the heterogeneity of expectations across agents. Essay Two examines international lending decisions. The separation of investors into leaders and followers is derived endogenously. In a dynamic model, the extent of such behavior is related to the persistence of states of the world across time. Some implications of the model are tested using data on international lending by US banks for the 1982-1994 period. The results support the main predictions of the theory. Essay Three derives the vulnerability of a banks to exogenous shocks as the endogenous outcome of financial reform. It is shown that a banking crisis may endogenously occur as a result of a decrease as well as an increase in the probability of bailout of banks. Also derived is the minimum size of an exogenous shock--increase in foreign interest rates sufficient to produce a banking crisis. The implications of the model are discussed in the context of several case studies of recent banking crises. Essay Four examined the interrelation between finance and growth. Deposit interest rates and the size of financial sectors are often used in empirical research to measure financial conditions and both appear to promote growth. Do they capture the same aspects of the effect of finance on growth? It may be the case that the size of a financial sector proxies for the volume of available loanable funds while the level of the deposit interest rate proxies for the efficiency of allocation of these funds. Such significant and independent effects are empirically tested in this research note.
