In undergraduate international economics coursework students are often exposed to the IS-LM-BP model via diagrammatic analysis. The model itself presents the intuitive mechanics behind how an open economy functions and is generally regarded as useful to policy makers. The goal of this paper is to present an in-depth investigation of the IS-LM-BP model through algebraically representing its components. Our model features a two-country framework with sticky prices and flexible exchange rates. We display some interesting relations between factors that must hold in order for monetary and fiscal policy to be effective. Additionally, a peak at a possible extension to the model is presented in the last section.

The CEPIE working paper series serves to promote scientific discussion in the realm of public and international economics. An initial outlet for current research results, CEPIE working papers are often of a preliminary character.

The CEPIE working paper series serves to promote scientific discussion in the realm of public and international economics. An initial outlet for current research results, CEPIE working papers are often of a preliminary character.

Formal savings accounts can be an effective device for households to accumulate assets over time and thus have more funds available to better afford an expensive one-time payment, in the form of either addressing an economic shock or paying for an important life event. I explore this relationship using a field experiment in rural Malawi conducted from 2008-2010, and find that adoption of a formal savings account has no effect on the frequency of economic shocks that a household experiences, nor does it affect how households respond to shocks. However, I find that account adoption does significantly increase the frequency of a household’s expenditures on the life event of payment of secondary school fees. These findings indicate that, given enough time, adoption of a formal savings account allows a household to better accumulate its excess income, and therefore better afford expenditures that involve a decision by the household, as economic shocks tend to be exogenous and payments surrounding life events endogenous. These results support the effectiveness of a policy that extends formal financial services to rural, poor populations who may not have access to such services, as households can use excess funds to finance important life events that help future generations to escape a poverty trap.

This thesis contributes to the empirical literature about how uncertainty affects firm-level investment behavior and capital accumulation using a structural econometric approach. Chapter 2 surveys the literature and highlights that there are two key channels through which uncertainty may affect investment decisions. One reflects the non-linearity of operating profits in stochastic demand or productivity parameters, summarized as the Hartman-Abel-Caballero (HAC) effect. Another reflects frictions in capital adjustment, summarized by different forms of capital adjustment costs: partial irreversibility, a fixed cost of undertaking any investment and quadratic adjustment costs. Chapter 3 presents simulation evidence about the effects of uncertainty on investment dynamics and capital accumulation through different forms of adjustment costs. Using the Method of Simulated Moments, Chapters 4 and 5 estimate fully parametric structural investment models, for panels of Brazilian and UK manufacturing firms, respectively. Chapter 4 investigates the effects of reducing capital adjustment costs. Counterfactual simulations indicate that investment would be much more responsive to new information about profitability if firms in Brazil faced a lower level of adjustment costs. A lower level of adjustment costs would also induce firms to operate with substantially higher capital stocks. Both these effects are mainly due to the importance of the estimated quadratic adjustment costs. Chapter 5 then investigates the effects of changing the level of uncertainty. The estimated investment models predict a small effect of uncertainty on investment dynamics in the short-run, and a negative and potentially large effect of uncertainty on capital accumulation in the long-run. The long-run effect of uncertainty operates through the negative effect of quadratic adjustment costs in the baseline model, or through a richer combination of effects in an extended model that allows discount rates to vary with the level of uncertainty.

The gravity model of trade is the workhorse model for international trade. In its most basic form, it stipulates that bilateral trade flow between two countries is proportional to the countries’ Gross Domestic Product (GDP) and the distance between them. According to the gravity model, the elasticity of trade flows to distance, or the “distance effect,” has increased since the early 1970s, a confounding empirical result known as the “distance puzzle.” This paper investigates the distance effect more closely by decomposing it. More specifically, it aims to isolate the effects from culture, constructing measures of cultural distance and examining their effects on bilateral trade levels and the distance effect. The results show that cultural differences do not account for the distance puzzle. However, it also finds that cultural distance has both a substantial and statistically significant effect on bilateral trade.

Thesis advisor: Fabio Ghironi / This dissertation is a collection of three essays which examine issues at the intersection of international economics, political economy, and macroeconomics. A common theme which emerges in the subsequent chapters is a reliance on intuitive models of economies populated by rational agents engaging in both political and economic decisionmaking. Each chapter also presents empirical evidence using aggregate data to highlight new angles on issues related to macroeconomic development policy. Concurrent cross-country political change, such as the recent ``Arab spring" revolutions in the Middle East, the experience of South American military dictatorships in the 1970s and 1980s, and political transition in former Soviet-bloc countries at the end of the Cold War, suggests that global forces impacting multiple countries can serve as a trigger for intrastate conflict. A common conjecture is that economic forces have been a primary impetus for such episodes. In the first chapter, I analyze the effects of worldwide commodity price fluctuations in generating political conflict in developing countries. I develop a simple model to show that shocks to both the level and uncertainty of commodity export prices can elicit conflict events in developing countries. Econometric evidence from a dataset combining major intrastate political resistance campaigns and global food commodity price data lends support to this hypothesis. In the second chapter, I examine whether corruption within one country affected by corruption within another. Understanding the interactions between political-economic culture across countries can allow us to better grasp the implications of greater global and regional integration in recent history. Until now, few studies have examined this question in detail due to the difficulty of measuring corruption and paucity of consistent data over an adequate time span. I use a panel dataset of countries in Asia, Latin America, and the Middle East over a span of fifteen years to examine how domestic corruption reacts to the culture of corruption in the region in which the country is located. Contrary to the results of past literature, I find evidence that a reduction in regional corruption can actually lead to a worsening of corruption within a country, and vice versa. If in an open economy, regional graft lowers the level of income that a rent-seeking government can tax, a reduction in regional corruption can increase the marginal benefit of imposing a more extractive domestic policy by increasing the pool of exploitable funds. My results offer an economic reason for why corruption will be an enduring institution in a more interconnected world. Finally, are less democratic governments more apt to intervene in the prices of imported goods than exported goods? In the third chapter of this dissertation I offer an explanation for why this might be the case, focusing on a government's choice between two alternative interventionist trade policies: import tariffs and export subsidies. If governments have incentives to exploit their political power to extract rents from citizens, they can achieve this by taxing imports rather than subsidizing exports. However, if citizens are able to discipline their governments through elections, the extent of this rent-seeking behavior can be constrained. I present a model that captures this behavior, distinguishing between the level of electoral accountability of a government and the level of bargaining power that citizens have in negotiations. Preliminary empirical evidence is presented which suggests that more authoritarian countries spend greater amounts on import tariffs than on export subsidies. These findings give insight into some of the challenges in establishing free trade amongst countries with different attitudes toward democratic institutions, both on a bilateral basis and within multilateral organizations. / Thesis (PhD) — Boston College, 2013. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

O objetivo deste trabalho é realizar um teste empírico da teoria de precificação de ativos em um conjunto de países. Em geral, a literatura utiliza testes para o modelo CAPM a partir de uma cross-section de ativos, encontrando evidências que vão tanto ao seu encontro como o refutam. No presente trabalho, entretanto, utiliza-se um teste de mudanças no nível de exposição ao risco sistemático, de maneira similar a Chari e Henry (2004). O experimento natural será a concessão (ou perda) de grau de investimento das principais agências de risco. A hipótese é que ativos sujeitos a novo nível de risco sistemático devem ter seu retorno alterado de acordo com as respectivas magnitudes individuais das diferenças no nível de exposição ao risco sistemático. Os resultados confirmam o que se espera ao examinar-se a teoria. / The objective of this dissertation is to perform an empirical test of the asset pricing theory in a set of countries. The literature usually tests CAPM from a cross-section, finding evidence that both confirm and refute theory predictions. In the present dissertation change in levels are used to test CAPM, similar to Chari and Henry (2004). The natural experiment is the countries\' rate upgrade to investment grade or downgrade to speculative grade by major ratings agencies. The hypothesis is that return of assets subject to a change in levels of systematic risk should be amended in accordance with their respective magnitudes of individual differences in exposure to systematic risk. The results confirm theory predictions.

Esta dissertação tem como objetivo medir os efeitos do Mercosul em termos de criação, desvio de comércio e desvio de exportação, usando uma base de dados abrangente e o que há de mais moderno na literatura de gravidade. Nos últimos anos, houve um grande avanço tanto na teoria quanto na estimação de equações de gravidade, o que ajudou na microfundamentação destes modelos e na obtenção de resultados consistentes. As estimações feitas mostram que o bloco possibilitou uma criação de comércio, o que ocorre quando tanto o comércio realizado intra bloco quanto com o resto do mundo aumentam. Além do mais, foram estimados modelos com a finalidade de verificar como os efeitos do Mercosul sobre comércio evoluíram ao longo dos anos, mostrando que o efeito maior do bloco se deu nos anos 90. Outra importante questão analisada foi o impacto do Mercosul sobre dois setores econômicos: agricultura e indústria. Nestes setores também houve indícios de criação de comércio, no entanto a indústria presenciou desvio de exportações em direção ao bloco. Por fim, foram construídos alguns grupos contrafactuais, que indicam que na ausência deste acordo o comércio teria sido menor, apesar dos efeitos serem heterogêneos entre os anos e os países. / This dissertation aims to measure the effects of Mercosur in terms of trade creation and diversion and export diversion, using a comprehensive database and the most modern instruments in gravity literature. In recent years, there has been a great advancement in theory and estimation of gravity equations, which helped the microfoundation of these models and the obtainment of consistent results. Our estimates show that Mercosur resulted in trade creation, which occurs when both the intra regional trade and trade with the rest of the world increase. Moreover, we estimated some models in order to see how the effects of Mercosur on trade has evolved over the years, showing that the greatest effects occurred in the 90\'s. Another important issue discussed was the impact of Mercosur on two economic sectors: agriculture and industry. In these sectors there was also evidence of trade creation, however industry has suffered exports diversion towards the block. Finally, we constructed some contrafactual groups, which indicate that in the absence of Mercosur trade would be smaller, although the effects are heterogeneous across years and countries.

Rising inequality affects the dynamics of macroeconomic variables both at home and abroad. Abroad, rising inequality causes an over-accumulation of foreign assets, creating persistent current account deficits. Inequality leads to rises in government transfers, and if raising tax revenue through a progressive income tax system is increasingly costly, sovereign nations could accumulate on debt and increase their default risk. At home, rising inequality in income increases household debt accumulation, which increases the probability of a household default crisis. This thesis examines the mechanisms behind the relationship between rising inequality and the above macroeconomic variables, and offers some policy recommendations. In the first chapter, I examine the relationship between top income inequality and the current account. Using panel error correction methods I observe a long-run relationship between rising top income shares and falling current account conditional on highly progressive income tax systems. Since tax revenues rise with top income inequality if marginal income taxes are progressive, the negative conditional relationship appears either if fiscal revenues are transferred to households who become more avid consumers, or if government expenditure increases along the inequality trend. I incorporate these findings into a dynamic general equilibrium model to study the effects of the top and bottom income tax cuts on the current account and fiscal balance. As the income share at the top rises, a tax cut at the margin to them improves the current account, since top income households are generally savers, but hurts the fiscal balance through revenue reduction. On the other hand, a bottom tax cut lowers the current account balance but does not have much of an adverse impact on the fiscal balance. In the second chapter, I examine how inequality increases the probability of sovereign default by studying the Latin American default episodes of the early 1980s. The sovereign borrows for the purposes of redistribution and to cover government expenditure. Default on sovereign bonds occur when the one time increase in utility of poor households due to higher transfers outweighs the risk of remaining in autarky for an extended period of time, and the resource cost of raising revenue through a more progressive income tax system becomes too high. In the third chapter, I examine how accumulation of household debt contributes to the probability of household crisis, which leads to an initial decrease in inequality but a persistent rise afterwards. Idiosyncratic increases in the income of impatient households increase their borrowing due to the rise in consumption of durable goods, but act as a pecuniary externality on other impatient households by driving up the interest rate. As a result the risk of an economy wide crisis rises. Inequality in income and wealth has significant implications for the dynamic decision making of households and governments, and widening inequality often leads to the accumulation of debt for households and governments alike. Knowing the mechanisms behind these relationships is important for the design of policies both for institutions that oversee the redistribution of wealth, as well as for institutions that oversee the financial markets of a country.