Thesis advisor: Peter N. Ireland / This dissertation consists of three essays that examine macroeconomic implications of trade liberalization. There has been a long-lasting debate on how trade openness influences the effectiveness of monetary policy. The first two essays provide a novel empirical and theoretical investigation into this issue. Motivated by recent new phenomena in U.S. labor market, the third essay is a work in progress that seeks to explore the evolution of U.S. manufacturing employment structural dynamics, and its connection with import competition. The first essay uses annual data of US manufacturing industries at 4-digit SIC level from 1972 to 2005 to conduct the empirical analysis. It shows that trade openness is negatively associated with industry-level effect of monetary policy, and at a given degree of trade openness, industries that involve in offshoring don't necessarily exhibit weaker responses. These empirical findings are hard to reconcile with the implications of standard open economy New Keynesian model, which indicates that trade openness strengthens the effectiveness of monetary policy and doesn't model offshoring separately. The second essay provides a new open economy New Keynesian model that can explain the empirical findings in the first essay. The model features endogenously determined international trade pattern based on Ricardian trade theory, and one-way offshoring from the advanced economy to the less developed one. This model highlights a new channel through which trade openness influences the monetary transmission mechanism: a decline in both trade and offshoring costs raises labor demand elasticity. Trade openness weakens the effects of monetary policy changes on output and inflation by dampening the responses of the domestic labor market. The calibrated model indicates that, when the economy moves from trade and financial autarky to a modern trade regime with an incomplete international financial market, the monetary policy shocks have 22% less of an effect on real GDP and consumer price inflation. The third essay provides the motivation on why to explore the evolution of U.S. manufacturing employment structural dynamics, introduces the methodology, and describes the dataset as well as future works. / Thesis (PhD) — Boston College, 2016. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

Thesis advisor: Fabio Ghironi / Chapter 1: Foreign Direct Investment and Contract Enforcement Many developing countries are financially constrained and therefore have to rely on international capital flows to finance economic activity. Empirical evidence shows that Foreign Direct Investment (FDI) as a percentage of total capital flows is higher for less developed countries compared to more developed countries. This chapteruses a dynamic contracting model with human capital to explain why less developed countries receive a greater percentage of capital flows as FDI. I analytically show that countries that are financially constrained have a higher share of FDI in total capital flows, and that the share of FDI in total capital flows is increasing in human capital flows. In addition, the positive association between the share of FDI in total capital flows and human capital flows is decreasing in the degree of financial constraints. I construct a measure of intangible assets of FDI and find empirical support for the analytical results. Chapter 2: Trade Liberalization, Firm Heterogeneity, and Unemployment: An Empirical Investigation This chapter is a joint work with Yoto V. Yotov. We provide empirical evidence for the interaction between firm-level total factor productivity and trade liberalization as key determinants of firm-level job destruction caused by trade. Employing US firm-level data, we find strong empirical support for the following: a) All else equal, a one percent increase in total factor firm productivity decreases trade-induced layoffs by 32%; b) An additional percent of trade liberalization increases the number of firm-level trade-induced layoffs by 2%; c) Trade liberalization results in an increase in the minimum level of productivity required for domestic production; d) Trade liberalization lowers the minimum productivity threshold required for exporting; e) The increase due to trade liberalization in the minimum productivity threshold for domestic production is larger than the absolute decrease in the export productivity threshold. Chapter 3: Do Audit Fees Influence Credit Risk and Asymmetric Information Problems? Evidence from the Syndicated Loan Market This chapter is a joint work with Lewis W. Gaul. We examine whether an increase in the demand for auditing services is associated with a decrease in borrowers' credit risk and asymmetric information problems in the syndicated loan market. In the syndicated loan market, potential accounting errors exacerbate credit risk and asymmetric information problems. The purpose of financial statement audits is to provide reasonable assurance that accounting records are free from material errors. We hypothesize that if audit fees face an upward sloping supply curve for auditing services, an increase in the demand for auditing services increases both the equilibrium price and quantity of auditing services purchased. We interpret the equilibrium quantity of auditing services as the number of auditing hours billed and the price of auditing services as the hourly fee. We assert that an increase in the quantity of auditing services purchased reduces the likelihood of an accounting error because auditors exert more effort verifying the accuracy of accounting records. We present empirical evidence that a demand-induced increase in audit fees is associated with syndicated loans with lower interest rate spreads and shorter maturity lengths, which we interpret as evidence consistent with the assertion that these audit fee increases reduce credit-risk and asymmetric information problems. We empirically identify an increase in the demand for auditing services with instrumental variables that are intended to capture shifts in the demand curve for auditing services, rather than shifts in the supply curve for auditing services. In addition, we find that audit fees are positively associated with the number of lenders in loan syndicates, but are unable to attribute this association to an increase in the demand for auditing services. / Thesis (PhD) — Boston College, 2009. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

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This paper examines trade openness and economic growth. What has been the effect of openness to trade on economic growth in Kenya? Kenya’s trade policies have emerged since independence, it has improved from import substitution to progressive liberalization through emergence of export processing zones, reduction of tariffs levels, eliminated price controls and licensing requirements leading to modest growth in trade Republic of Kenya (2005). Although the country has improved in it’s trade policies, it is still counted as mostly unfree. Empirical evidence suggests that free trade leads to a better economic performance in different channels, however the evidence has been questioned because of the doubts on how trade openness of a country should be measured and methodology estimation. The study uses trade intensity as a measure of trade openness. Applying Ordinary least squares using a time series data obtained from the World Development Indicators a negative relationship is seen between trade openness measure and Gross domestic product in Kenya. A Granger causality test is done also to determine whether trade liberalization can be used to give significant information about the economic growth of Kenya or vice versa. Vector Auto regression model (VAR) is used to determine the Granger causality. In the OLS regression model measures of openness, labor and capital are significant.

The first chapter studies the effects of financial obstacles to productivity improvement in the context of trade reforms, by constructing a dynamic heterogeneous firms model with financial frictions. Trade reforms are considered beneficial because they confront the liberalized country’s firms with more competition from abroad and increase their incentives to become more efficient. This implies that if poor countries do not improve their productivities they might lose the intended gains from liberalization. Financial frictions however have been quoted an important obstacle for firms to improve their productivities. To address these issues, first, using data on 15 trade liberalization episodes, I document that more financially developed countries experienced more productivity growth after their trade liberalization. Second, I construct a dynamic heterogeneous firms model with financial frictions in financing costs for productivity improvement. Calibrated numerical exercises show that if a country does not improve its financial intermediaries at the outset of trade liberalization it may lose as much as %40 of potential output gains and productivity improvements. The result has policy implications regarding the simultaneous reforms in trade and financial intermediaries. The Second chapter is a cross country empirical analysis aiming to provide evidence for the effects of trade openness and financial development on firms decision to upgrade their technology and the impact on the distribution of firm size across countries. The idea is that reduction of trade barriers is likely to affect incentives of bigger firms to grow to export markets as well as incentives of smaller firms to innovate due to increased competition. Financial frictions, however are likely to limit the scope of these decisions and more so for smaller firms and capital intensive industries. This is likely to have heterogeneous effects on firms leading to changes in firm size distribution. I hypothesize that a combination of trade openness and low financial development increases the relative size of big to smaller firms. To test this hypothesis, I take advantage of cross country/industry differences in trade protection and financial development/needs to provide enough variation for identifying these effects. Using establishment level data from OECD countries, I provide evidence for this hypothesis, by performing double difference estimations. In addition using firm level data on 20,000 firms from World Bank’s enterprise survey, I provide more evidence that trade openness promotes productivity growth particularly for bigger firms in less financially developed countries. The finding contributes to the literature on importance of finance for firm growth by focusing on the channel of heightened competition due to trade. It highlights the importance of incorporating financial aspects of a country in trade analysis. The third chapter is an exercise exploring the welfare gains of trade in a North-South trade where counties are asymmetric in their ability to produce more sophisticated goods. The exercise is based on the model by Matsuyama (JPE 2000), where the world is a static Ricardian model with a continuum of goods and unit demand non-homothetic preferences. One country (the south) has comparative advantage in production of goods with lower income elasticity of demand. As a result, over time with uniform global improvement in technology in the form of smaller unit labor requirements, the terms of trade moves against south. The numerical exercise, calibrates stochastic interpretation of the model to for a specific choice of countries and provides evidence that over time, if the patterns of specializations are not changed drastically, the country specialized in production of less sophisticated goods disproportionately grows less than the other one and has the terms of trade moving against it. / text

Chapter 1 develops a two-period general equilibrium trade-theoretic model to examine if foreign aid discourages the recipient countries from pursuing trade liberalization. In the model, foreign aid is given to the recipient in period two and its amount is negatively related to the period-one real income. The recipient optimally chooses a tariff on imports. It can also choose domestic investment endogenously in period one, and this choice has an important bearing on our main result. We consider two variants of the model depending upon whether the recipient can or cannot have access to international borrowing. In the case without international borrowing, when domestic investment is exogenous, optimal tariff is zero. In contrast, when domestic investment is endogenous, optimal tariff is positive. This positive optimal tariff is induced by the link of aid negatively to the period-one real income. In the case with international borrowing, even though domestic investment is exogenous, optimal tariff is positive. But the reason for the positive tariff is its beneficial effect on an improvement in the terms-of-trade of international borrowing. When, in addition, domestic investment is endogenous, the tying of aid increases positive optimal tariffs further. Chapter 2 develops a microeconomic model of health policies and the optimal allocation of health aid in a poor recipient country. In the model, each poor household in the country chooses the optimal number of sick children taken to hospitals to maximize its lifetime utility. There are three policy options for policymakers to improve public health: raising the quality of health care, providing more preventive care and reducing the cost of health care. We examine how three policy options influence the optimal number of sick children who are medically treated. Also, the country's health authority allocates health aid for three policy options to support poor households' lifetime utility maximization. We find that more health aid should be allocated for cost reduction in health care so as to help poor households maximize their lifetime utility. Chapter 3 primarily examines the hypothesis that there is heterogeneity in health aid, that is, different types of health aid work differently for health outcomes in aid-recipient countries. In order to test our hypothesis, we first disaggregate health aid per capita data into three policy options: health aid per capita for improving the quality of health care, health aid per capita for providing preventive care and health aid per capita for reducing the cost of health care. Then, we empirically examine the effects of disaggregated health aid on three different health indicators: child mortality, life expectancy and death rate. Using a panel data set of 119 aid-recipient countries from 1975 and 2010, we find supporting evidence for the hypothesis of heterogeneity in health aid. We find no empirical evidence of the beneficial effects of health aid on reducing child mortality. In contrast, we find that an improvement in life expectancy and a reduction in death rate are driven mostly by health aid for reducing the cost of health care. We also find that there is heterogeneity in the allocation of health aid. Health aid for preventive care and the cost reduction of health care is allocated by the needs of the recipients. However, more health aid for the quality of health care flows to countries with better health status.

Since South Africa entered the international markets and opened its borders to international trade, the economy has undergone a gradual process of trade reforms ensuring that the South African economy becomes competitive. It is recognized globally that trade liberalization is a key factor to enhancing economic welfare, trade, and efficiency. Trade liberalization aims to reduce import protection and enable easy flow of resources from sectors that are less competitive to sectors with a comparative advantage. Hence, trade liberalization is believed to play an important role in spurring growth and improving household welfare through various channels. This study analyses the impact of South Africa's trade liberalization on household poverty between 1996 and 2001 at a local level using regional level indicators of trade exposure. The study uses household income as a proxy for household poverty. The results using the simple OLS estimator leads to some interesting findings. We find that there is a positive relationship between household income and sectorial weighted average tariff in region, that is, trade liberalization led to a reduction in household income in the region. We also find that increased exposure to tariff reductions translates to an increase in the number of individuals employed in a household. However, this does not appear to be the case with employment in the manufacturing sector. We find that tariffs reductions reduced employment opportunities in the manufacturing sector, leading to reductions in individuals employed in the manufacturing sector. Lastly, we find that household income of households that have a high share of family in the manufacturing sector are negatively affected by tariff exposure. These results illustrate structural changes in response to tariff liberalization led to varied impacts across households and regions in South Africa.

The extent to which labour market are affected by trade liberalization depends crucially on their ease of reallocating labour and factors of production across regions and sectors of the economy. However, previous literature has provided little insight on the role of migration and labour market frictions in shaping the effects of trade reform across regions in South Africa (SA). This paper considers this key question by observing the effect of tariff reform on the spatial reallocation of labour across sectors and regions over the period, 1996 to 2011. Overall, tariff reductions on imports in SA has induced spatial reallocation of labour in SA with a dominant flow of labour from regions/sectors with characteristically high tariff reductions towards regions/sectors of low tariff reductions. Critically, the paper finds that pull factors assimilated through the import competition channel have a positive significant effect on the migration rate, while the opposing push effect is insignificant.

Since the conclusion of world War II, Taiwan, the Republic of China (ROC), has developed into an industrialized country following a long period of severe inflation. Taiwan has produced a successful example of economic development through export expansion. Exports and imports of Taiwan increased from approximately 10 percent of the gross national product (GNP) in the 1950s to more than 45 percent in the 1980s. The role of Taiwan's foreign exchange rates and traderelated policies on exports and imports was examined in this study. Trade-related policies implemented by the government of ROC were documented from 1950 to 1980 by categorizing the past 30 years into import substitution, export promotion, external shocks, and the 1980s trade liberalization periods. In addition, this study analyzed quarterly import and export data from 21 sectors between 1981 and 1991 to measure the effects of changes on the exchange rate. variables included in the regression analysis were GNP of Taiwan and exchange rate for import demand functions and GNP of the U.S. , export price index in Taiwan and Korea, and exchange rate for the export demand function. Partial auto- correlation functions were estimated and examined for 21 export and import commodity groups to determine the appropriate number of lags in the demand function. In sectors in which regressions were found to be significant, an econometric partial adjustment model was used for estimating short- and long-run exchange rate elasticities.

Liberalization of the Indian economy in 199I increased the intensity of international competition and changed the internal information needs of Indian managers. This paper explores the evolution of a broad range of management accounting practices in 14 firms using a contingency theory framework. Differences in management accounting practices in 1996 are examined in relation to firms' experience and exposure to world markets prior to liberalization and as a function of contemporaneous differences in competitive strategy. We find evidence of changes associated with shifts in the external environment. / University of Michigan Business School