Essays in International Economics

Abstract

This collection of essays examines different topics in international economics. The first two chapters study the role that declines in trade barriers play in shaping the world distribution of net exports, also known as trade imbalances, and sectoral reallocation of economic activity in the U.S., a process also known as structural transformation. The third chapter is co-authored with Gabriel Tenorio and studies optimal capital account policy in small open economies subject to the risks of volatility in international interest rates.

The first chapter proposes a framework that embeds a quantitative multi-country general equilibrium model of international trade into a dynamic framework in which trade imbalances arise endogenously. I calibrate the model and provide a decomposition that shows that 69 percent of the increase in world trade imbalances between 1970 and 2007 can be explained by the decline in trade costs across countries. Moreover, the effect of lower trade costs on trade imbalances is heterogeneous across countries.

The second chapter considers a static general equilibrium open economy model of structural transformation to explore the implications of lower trade costs and trade deficits on structural change in the U.S. The results show that declining trade costs and increasing trade deficits in the U.S. between 1970 and 2007 significantly contributed to the decline in manufacturing's share in value added. In the absence of declines in trade costs and imbalances, the decline in this share is approximately half of the decline in the baseline calibration of the model.

In the third chapter we study optimal policy responses to shocks in the mean and volatility of the external interest rate in a small open economy with an occasionally binding borrowing constraint. We show that the modeled evolution of interest rates around episodes of sudden stops is consistent with the empirical evidence for a group emerging markets. We solve the problem of a constrained social planner and show numerically that policy is contingent on the level and volatility of external interest rate shocks, and that the intensity of the optimal policy is nonmonotonic with respect to the volatility of external shocks.