This thesis examines the interaction between real and financial decisions in a two-country
world economy. To understand this interaction, we develop two-country general equilibrium
multi-period models of pure exchange and production economies. We model the
real decisions of consumption and investment choice and the financial decisions of portfolio
choice explicitly under various degrees of financial market integration. In addition,
we allow the governments to act strategically in making their policy choice regarding
the degree of integration in the international goods and financial markets. Therefore,
our models allow us to examine the effect of the interaction between real and financial
decisions on policy choice in the goods and financial markets.
The main results in the thesis are presented in Chapters 3, 4 and 5. We first analyse
how the optimal tariff decision may vary under different financial market structures.
In order to do so, we determine the government's choice of tariff level using a two-good
general equilibrium framework where the financial structure in the economy is
explicitly modelled. We find that the extent to which of financial markets are integrated
affects trade policy decisions in the commodity markets. Specifically, we find an inverse
relationship between the Nash equilibrium tariff level and the degree of international
financial market integration. The intuition underlying this result is as follows. In our
model, the government uses tariffs to cause a favourable change in the terms of trade.
However, in the presence of financial markets, households can hedge endowment risks
and the change in the terms of trade by using financial contracts. Thus, the favourable
terms of trade effect (which is the motivation for a tariff in our model) associated with a tariff levy is reduced with increasing degrees of financial integration.
Given the influence of financial market structure on endogenous trade policy, we then
characterise and numerically compute the welfare gains from financial market integration.
We identify the welfare gains from two sources. The direct source is the gain from
risk-sharing in the financial markets. The second source is the gain from free trade in
the commodity market that results from a government's tariff game in the presence of
complete financial integration. We find that the magnitude of the welfare gain due to free
trade is substantially greater than that due to increased risk-sharing capabilities under
a reasonable calibration of our world economy.
Thus far, we have assumed the financial market segmentation in the economy to
be exogenous and our results suggest that the existing financial market structure has
important repercussions in the-commodity markets. In the third part of our analysis, we
analyse the government's choice of financial market structure. To do this, we examine
the equilibrium policy choice of financial market segmentation in the absence of trade
policy. That is, under what conditions will a country find it optimal to limit access to
its own or foreign capital markets? Our results suggest that in the special case in which
the production technology exhibits constant returns to scale in capital, each country may
choose to deny foreign access to its domestic stock market. In general however, we find
that complete financial market integration will be the optimal choice for both countries.
Our main finding is that there are strong interactions between financial markets and
goods markets. Consequently, the optimal tariff level can be very different under different
financial market structures. Also, the welfare impact of opening financial markets can
be large, given the influence of financial market structure on endogenous tariffs in the
goods markets. Finally in a production economy, the optimal financial market structure
can be related to the nature of the production technology. Some policy recommendations follow from our work. First, the existing financial
market structure in the economy should be considered in making the policy choice of
a tariff level: the more integrated the financial markets, the lower the optimal tariffs.
Second, the share of capital in a country's production technology is an important factor in
the decision of the optimal financial market structure. When the production technology
exhibits decreasing returns to scale in capital, the optimal financial structure is complete
integration.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:BVAU.2429/6709 |
| Date | 11 1900 |
| Creators | Lee, Khang Min |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Relation | UBC Retrospective Theses Digitization Project [http://www.library.ubc.ca/archives/retro_theses/] |
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