Essays on finance and business cycles

This dissertation explores the relation between finance and business cycles. It consists of three empirical essays: "External Debt and Financial Instability: Minsky Cycles in Open Economics," "International Capital Flows and Destabilizing Fiscal and Monetary Policy," and "Financial Instability and the Business Cycle: A Kalman Filter Approach with Markov Switching."; In the first essay I investigate the relation between external debt and business cycles in four Latin American countries using an extension of Minsky's financial instability hypothesis to the open economy. Using time-series data for four Latin American countries, this paper investigates whether external debt and GDP growth relate in a pattern consistent with Minsky's financial instability hypothesis. The evidence supports, at least partially, the existence of financial instability cycles for all countries investigated.; The second paper examines whether Latin American countries practice pro-cyclical fiscal and monetary policies. In contrast with the literature on the subject, this paper considers the possible simultaneous determination between policy and GDP growth. Additionally, this paper explores the direct impact international capital inflows have on these policies. The evidence suggests that most of the countries experience destabilizing fiscal and monetary policy and that capital flows consistently influence policy in a pro-cyclical direction, as suggested by the literature.; The third paper is based on coauthored work with Ryan Compton. This paper develops composite measures for four areas of the U.S. financial market, the stock market, debt, money, and interest rates, using a dynamic factor model. In addition a single composite measure is created for the financial system as a whole. The evidence appears to support that debt, money, the stock market and the financial system as a whole influence U.S. business cycles. The results are strongest for the stock market measure.