Essays on International Trade, Growth and Finance

[Pages:299]Essays on International Trade, Growth and Finance

by

Marc-Andreas Muendler

GRAD (University of Munich, Germany) 1998 M.A. (Boston University) 1997

A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy

in

Economics

in the

GRADUATE DIVISION of the

UNIVERSITY OF CALIFORNIA, BERKELEY

Committee in charge:

Professor Maurice Obstfeld, Co-Chair Professor David H. Romer, Co-Chair Professor Daniel L. McFadden Professor Ann E. Harrison

Spring 2002

The dissertation of Marc-Andreas Muendler is approved:

Co-Chair

Date

Co-Chair

Date

Date

Date

University of California, Berkeley Spring 2002

Essays on International Trade, Growth and Finance

Copyright 2002 by

Marc-Andreas Muendler

1

Abstract

Essays on International Trade, Growth and Finance by

Marc-Andreas Muendler Doctor of Philosophy in Economics University of California, Berkeley Professor Maurice Obstfeld, Co-Chair Professor David H. Romer, Co-Chair

Two concerns in international economics motivate the essays.

I. Does foreign trade harm or foster growth? Two essays look at this question from different perspectives. The first essay takes a dynamic general-equilibrium approach. Contrary to earlier partial-equilibrium models, the essay shows that trade can contribute to reducing the productivity gap between less developed and more advanced regions even if the advanced region hosts most of the innovative industries with dynamic externalities. Productivity may diverge in some cases. Even then both regions generally benefit more from trade than they lose.

The second essay investigates microeconomic effects empirically. It analyzes the channels through which trade has induced productivity change in Brazil after the country liberalized its tariff act in 1990. The facilitated access to foreign inputs plays a minor role for productivity change. However, foreign competition pushes firms to raise efficiency markedly. Counterfactual simulations indicate that this competitive push is a salient source of immediate productivity change. In addition, the shutdown probability of inefficient firms rises with competition from abroad and exerts a positive

2 impact on aggregate productivity over time.

II. What role does information play in financial markets? Evidence from financial crises suggests that investors possess information about troubled assets early on but do not act upon the information until a crisis looms. This behavior has consequences for the timing and prevention of crises. The two essays in this part introduce an integrated model of information acquisition and portfolio choice. The essays provide new tools for the analysis of information in financial markets, resolve a long-known no-equilibrium paradox, and clear the way for subsequent applied research into international financial crises.

Employing different conjugate prior distributions, the essays demonstrate when investors value information and act on it. More information allows investors to select less risky portfolios. When the asset price is fully revealing, markets do provide information but less than socially desirable. However, more information has a negative effect when becoming commonly known. Commonly shared information moves the asset price closer to the individually expected return, thus reducing the value of the risky asset.

Professor Maurice Obstfeld, Co-Chair

Professor David H. Romer, Co-Chair

i To Beatriz

ii

Contents

List of Figures

vi

List of Tables

vii

List of Abbreviations

viii

1 Seizing the Chances of Globalization and Averting its Risks

1

1.1 International trade and growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.2 Information in financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

I International Trade and Growth

7

2 Trade and growth revisited: Managing to converge, agreeing to diverge

8

2.1 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2.1.1 Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2.1.2 Technological change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.1.3 Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

2.2 Autarky and Free Trade Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

2.2.1 Monopolistic competition in the modern sector . . . . . . . . . . . . . . . . . 16

2.2.2 Equilibrium number of varieties . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2.2.3 Autarky equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2.2.4 Equilibrium under free trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

2.3 Managing to Converge: The Technology Gap under Free Trade . . . . . . . . . . . . 27

2.3.1 Convergence under free trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

2.3.2 P. Romer's (1990) economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

2.4 Agreeing to Diverge: A Dynamic Welfare Analysis . . . . . . . . . . . . . . . . . . . 33

2.4.1 Repeated static gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

2.4.2 Dynamic welfare analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

3 Trade and productivity change: A study of Brazilian manufacturers, 1986-1998 43 3.1 Brazilian Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 3.3 Behavioral Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 3.3.1 Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 3.3.2 A firm's price, factor and investment choice . . . . . . . . . . . . . . . . . . . 55

iii

3.3.3 Competition and a manager's efficiency choice . . . . . . . . . . . . . . . . . 59 3.4 Firm-level Productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

3.4.1 Production and foreign input efficiency . . . . . . . . . . . . . . . . . . . . . . 61 3.4.2 Details on productivity estimation . . . . . . . . . . . . . . . . . . . . . . . . 63 3.4.3 Total factor productivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 3.5 Causes of Productivity Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 3.5.1 Channel 1: Foreign Input Push . . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.5.2 Channel 2: Competitive Push . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 3.5.3 Channel 3: Competitive Elimination . . . . . . . . . . . . . . . . . . . . . . . 81 3.5.4 Possible additional channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 3.5.5 Counterfactual simulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 3.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

II Information in Financial Markets

99

4 Another look at information acquisition under fully revealing asset prices

100

4.1 A Problematic Paradox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

4.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

4.2.1 Investors' beliefs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

4.2.2 The financial market equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . 112

4.3 Information Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

4.4 Informational Efficiency and Informativeness of Price . . . . . . . . . . . . . . . . . . 127

4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

5 Towards a theory of information acquisition in financial markets

134

5.1 Generalizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

5.2 The Lucas Tree Model with Information Acquisition . . . . . . . . . . . . . . . . . . 138

5.3 Fully Revealing Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

5.3.1 The financial market equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . 145

5.3.2 The information market equilibrium . . . . . . . . . . . . . . . . . . . . . . . 150

5.3.3 Informational efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

5.4 Partly Informative Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

5.4.1 The financial market equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . 156

5.4.2 Incentives and externalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

5.4.3 The information market equilibrium . . . . . . . . . . . . . . . . . . . . . . . 172

5.4.4 Informational efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176

5.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

6 An Outlook on Future Research into Globalization

183

Bibliography

186

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