Essays in international macroeconomics

Abstract

In the first chapter I investigate the role of position in global value chains in the transmission of final demand shocks and the cyclicality and volatility of trade. Relying on a production network model with propagation via procyclical inventory adjustment, I show how shocks can magnify or dissipate upstream. I test the theoretical results empirically using input-output data. I find that industries far from consumers respond to final demand shocks up to twice as much as final goods producers. I also document the critical role of the position in the global value chain for countries’ cyclical macroeconomic response: i) controlling for bilateral similarity in global value chain position eliminates the standard correlation between similarity in industrial structure and bilateral output comovement; ii) two indicators, measuring the number of steps of production embedded in the trade balance and the degree of mismatch between exports and imports,explain between 10% and 50% of th evolatility and the cyclicality of net exports. In the second chapter we develop a multi-industry growth model with oligopolistic competition and variable markups. Our model features a complementarity between capital accumulation and competition, which can give rise to multiple competitive regimes – regimes characterized by a large capital stock and strong competition and regimes featuring low capital and weak competition (low competition traps). Negative transitory shocks can trigger a transition from a high to a low competition regime. We also show that, as the firm size/markup distribution becomes more dispersed, the economy is increasingly likely to enter a low competition trap. In a calibrated version of our model, a transition from a high to a low competition regime rationalizes important features of the US great recession and its aftermath, such as the persistent drop in output and aggregate TFP, the decline of the labor share, the increase in the profit share, and the decline in the number of firms. In the third chapter we study how countries which share a common currency potentially have strong incentives to share macroeconomic risks through a system of transfers to compensate for the loss of national monetary policy. However, the option to leave the currency union and regain national monetary policy can place severe limits on the size and persistence of transfers which are feasible inside the union. In this paper, we derive the optimal transfer policy for a currency union as a dynamic contract subject to enforcement constraints, whereby each country has the option to unpeg from the common currency and default completely on any payment obligations. Our analysis confirms that the lack of independent monetary policy is an important obstacle to risk sharing within a currency union; however, under certain conditions, it is still possible to support substantial macroeconomic stabilization through state contingent international transfers within the union.