Three Essays In Open Economy Macroeconomics and Economic Development.

Abstract

This dissertation focuses on issues related to economic globalization and its implications for the domestic economy. The first two chapters pertain to international financial integration, while the last chapter studies the impact of interprovincial migration in China as a result of industrialization. The first chapter develops a dynamic stochastic general equilibrium model that accounts for the asymmetric cyclical features of fiscal policy between developed and emerging market countries. Sovereign borrowing with a default option implies that creditors require a higher risk premium when countries experience a sequence of negative shocks and accumulate debt, thereby deterring risk sharing and intertemporal consumption smoothness. The default option is shown to be the key driver for procyclical government consumption and transfer payments observed in emerging market countries, suggesting that sovereign default has significant effects on risk sharing and the behavior of fiscal policy. The second chapter explores how international financial integration provides risk sharing opportunities, paying particular attention to the diverse theoretical predictions for the consumption path responding to various types of income shocks. The results suggest that there is less than full consumption risk sharing overall, while OECD countries are insured better against predictable changes in transitory income. I also show that financial integration improves consumption risk sharing on the whole. The results support the hypothesis that financial integration leads to an even larger adjustment in consumption in response to a permanent shock to income growth. This can explain the higher relative volatility of consumption growth in the 1990s in emerging market countries. The last chapter examines the impacts of interprovincial migration at different educational levels on the creation and distribution of human capital in China. The observed external economies and diseconomies of gross outflow migration on new human capital investment are consistent with the mechanism of migration-oriented investment/disinvestment in higher education at source provinces. This positive externality eclipses the negative one at the national level. Moreover, the effects of net outflow migration on new human capital investment, based on the changes in relative labor supply, mitigate direct brain drain by both encouraging and discouraging school enrollments at various levels.