Essays on international finance and trade policy
Baumann, Brittany A.
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This dissertation covers both policy-oriented and theory-based topics in International Economics. The first two chapters cover financial policy related to the capital account, while the third chapter covers tariff policy related to the current account. The first chapter examines the theoretical value of capital controls in reducing the probability of bank runs. I develop a global game model with information-based bank runs and strategic complementarities within and between foreign and domestic creditors. My analysis appears to be the first to model the interconnectedness of foreign and domestic creditor behavior. The framework pins down the probability of a bank run and shows that a capital control can lower the probability of a domestic bank run and of capital flight. I also find that a control on outflows is relatively more effective than a control on inflows. Finally, I test the model's implications using the abnormal returns of Brazilian and South Korean bank stock prices as a proxy for the probability of bank runs. The second chapter analyzes the policy actions of Brazil and Chile between 2009 and the third quarter of 2011, when Brazil deployed capital account regulations and Chile intervened in its currency markets. I examine the effectiveness of each of these actions and the extent to which the actions of Brazil caused capital flow spillovers in the Chilean market. Consistent with the peer-reviewed literature on the subject, I find that capital account regulations had small but significant effects on the shifting the composition of capital inflows toward longer-term investment, on the level and volatility of the exchange rate, on asset prices, and on the ability of Brazil to have independence in monetary policy. Brazil's regulations did also temporarily cause an increase in capital flows into Chile. Chile's interventions did not have a lasting impact on the Chilean exchange rate or on asset prices beyond the initial announcements of the policies. In Brazil's case we thus conclude that Brazil's regulations helped the nation 'lean against the wind,' but were not enough to tame the 'tsunami' of post-crisis capital flows. The third chapter uses a computable general equilibrium (CGE) model calibrated to late nineteenth century parameters to show that protectionism alleviated the skilled wage gap. Had the U.S. chosen free trade instead of protective tariffs, wage inequality generally would have been higher in the post-bellum era. The imposition of high tariffs after the Civil War may have dampened what some economic historians believe to have been a long-term upward trend in inequality--the rising portion of the American-Kuznets' curve.