Essays in International Economics

Abstract

This dissertation consists of two essays. The first essay investigates the impact of capital account convertibility on the volatility of economic growth. Previous work has concentrated on the impact of convertibility on mean growth and has found contradictory results. Existing theoretical work suggests that impact of convertibility on volatility could differ across economies depending on their level of financial development. I test this hypothesis using a system of equations that allow for simultaneous determination of three endogenous variables: volatility, mean growth and financial development. I also allow for spillover effects in economic growth and its volatility. I find that financially developed economies are better able to handle capital account convertibility in the sense that convertibility does not lead to excess fluctuations in those economies. However less financially developed economies suffer a higher level of fluctuations with an open capital account. These results are robust to alternative measures of financial development and to removal of the top and bottom 10% of my sample. I also find significant spillovers from growth of trade partners on the mean growth of the domestic economy.

The second essay builds on Romer's (1994) idea that when there are fixed costs of entry into export markets, even low trade barriers can lead to the complete disappearance of some products and impose costs that are much larger than the conventional costs of protection. I incorporate Romer's insight into a fully specified general equilibrium model. In a two-country, differentiated goods model, assuming that firms are heterogeneous with respect to the costs of entry into the export market, I show that firms are divided into those that sell exclusively at home and those that also sell abroad. Larger firms export more and are also characterized by higher average productivity. The cost of protection is significantly higher when I allow products to disappear as a result of the tariff. My work is closely related to Melitz (2003) and Helpman, Melitz and Yeaple (2002) but differs in the mechanism underlying the results. Data from the Indian trade liberalization of the 1990s appears be in line with the results of the model.