The purpose of this thesis is to investigate the importance of macroeconomic factors such as monetary policy and political risk to international financial markets. In the first chapter, I study the welfare and asset pricing implications of monetary policy coordination in a two-country world. The building block is a sticky-price model with the long-run risk in which central banks either coordinate to jointly maximize global welfare or unilaterally optimize local welfare. Limited fiscal capacity leaves some firms unhedged against external risk. Therefore, non-coordinating central banks have the incentive to introduce unexpected deflation which serves as a defence mechanism to sustain the households purchasing power. I find monetary policy coordination can eliminate such deflation and achieve the first-best output levels, leading to welfare improvements equivalent to 1%–3% of steady state consumption.
In the second chapter, I generalize the long-run risk model with nominal rigidities to study the asset pricing implications. Qualitatively, I find lower risk premia under coordination but only a small fraction of this effect is passed on to the long-run growth. As a result, the asset pricing changes are quantitatively small as coordination only affects the level of consumption rather than the long-run growth of consumption.
In the last chapter, I study the importance of US presidential cycle to the dynamics of international stock returns. When the US president is a Democrat rather than a Republican, I find excess returns are 12% higher and dollar-based currency risk premia are 4.5% lower in a sample of 23 countries. The US trade policy could be a possible explanation for the return difference. When the president is a Democrat, I show that central countries in the trade network exhibit higher stock returns and lower volatilities than peripheral countries.