Essays on International Capital Flows and Productivity Growth
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Contrary to traditional neoclassical growth models, recent decades have seen a number of developing economies running sizable current account surpluses. In response to ``new mercantilist'' explanations of this phenomenon that relate holdings of foreign assets to higher levels of economic growth, this paper presents a theoretical model of a small open developing economy that permits a welfare analysis of mercantilist policies and importantly answers the question of whether mercantilist motives alone can explain the recent high levels of observed foreign asset holdings. Using a calibration to match the characteristics of China, the model shows that while such policies may lead to significant welfare gains, consumers' desires to smooth consumption generally preclude a positive current account balance under most parameterizations. Deliberate foreign asset accumulation may therefore be welfare reducing, or mercantilist motives may provide only one component of a fuller explanation of current account surpluses. The theoretical framework can be extended to consider the welfare effects of international capital controls and real exchange rate changes in a multi-country setting. I present a dynamic open-economy macro model with an endogenously determined rate of interest on internationally-mobile assets. All countries produce tradable and nontradable goods using technology that converges over time to a global frontier. The model quantifies the welfare effects of the unilateral implementation of capital controls that depreciate the real exchange rate on economies both already at and converging to the technological frontier. In certain contexts, I demonstrate that such government interventions may constitute ``beggar-thy-neighbor'' policies, such that developing economies that do not implement similar policies may experience a welfare loss realtive to a global laissez-faire setting. Next, I present empirical evidence on the relationship between exposure to international markets and productivity gains in a novel way. Total factor productivity (TFP) is estimated for an international panel of individual firms, while controlling for input selection endogeneity and market exit bias. These estimates are then used to construct country-level estimates of aggregate productivity, which are disaggregated between tradable and nontradable sectors using an objective criterion based on each country's actual industry-level export intensity. Using this unique data set, I test the common theoretical assumption that production activity in the tradable-sector is an impetus for faster productivity growth in the economy using a structural panel VAR analysis, finding positive effects of industrial labor shares on TFP growth. The data also provides further evidence of the expected relationship between sectoral growth differentials and exchange rates predicted by the Harrod-Balassa-Samuelson effect. Furthermore, the data provides evidence of cross-country convergence in tradable-sector productivity over time. Finally, consideration is given as to whether these relationships differ significantly between developed and developing economies, as might be induced by the existence of a global technology frontier.