Three Essays on Policy Issues in International Macroeconomics
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In the first chapter, I explore the role of multinationals and intra-firm trade in exchange-rate pass-through into US imports. Conventional international macroeconomics models exploring exchange-rate pass-through, and informing monetary policy, often ignore transfer pricing. This results in predictions about firm-level pass-through that are at odds with the micro-level, empirical evidence. Motivated by the transaction level evidence that exchange-rate pass-through tends to be higher intra-firm than at arms-length, I construct a simple two-country, two-sector model of intra-firm and arms-length trade. Intra-firm trade is carried out by vertically integrated multinationals that compete in Bertrand fashion with regular exporters in the upstream sector. Under reasonable assumptions on pricing decisions and the cost function, my model is able to match the micro evidence. I add to the conventional literature by showing that along with exporters' shares, intra-firm trade and transfer pricing by multinationals are important factors for exchange rate pass-through. Furthermore, this model provides a framework to evaluate changes in monetary policy, as well as the interaction between the profit-shifting incentives of transfer pricing and changes in fiscal policy. In chapter two, we propose and quantify one potential explanation for the empirical evidence on the large productivity gaps between urban and agricultural sectors in developing countries. If residing in a village provides access to a network that effectively insures against income fluctuations, then households are less willing to live in the cities where labor income risk is uninsured. As a result, labor remains cheap in agriculture, and the incentives for switching to capital-intensive methods of farming remain weak. In order to understand the quantitative importance of this mechanism, we calibrate the model to Indian data and study an abstract policy-intervention: a provision of complete insurance against earnings risk in the city. The policy intervention decreases the urban-rural labor productivity gap by 64 percent. This effect comes about because of the 10 percent drop in agricultural share of employment, which encourages an inflow of capital and raises average farm size by 18 percent. In chapter three, we study the interaction between skilled immigration policy changes in the U.S. and the offshoring decision of domestic firms in the skilled services sector. Given the substitutability between immigrant and offshore workers (Ottaviano et al. (2013), Olney and Pozzoli (2018), Ottaviano et al. (2018)) and frictions imposed by the current skilled immigration policy, firms have an incentive to incur additional costs and hire labor offshore. To study this channel and the associated welfare impacts on skilled and unskilled domestic households, we build a two-country model with skilled immigration, offshore labor hiring, and trade in intermediate inputs. Monopolistically competitive firms in the domestic skill-intensive intermediate goods sector produce output using domestic and immigrant skilled labor, and skilled labor hired offshore. Firms optimally hire immigrant skilled workers subject to a policy imposed cap, a sunk hiring cost, and an exogenous probability of return to the foreign economy. In the calibrated model, firms adjust their production towards higher offshore labor hired following a stricter domestic immigration policy. We show that it is important to account for the role of offshoring when evaluating the welfare impacts of skilled immigration policy changes on domestic households: by ignoring firm adjustments in offshore labor hired, we would overestimate the wage (and welfare) gain to domestic skilled households after an immigration cap reduction. We also show that the welfare impacts depend on the profit distribution and the presence of labor market frictions. This analysis has two main contributions. First, as Ottaviano et al. (2018) note, much of the literature has focused on offshoring in the manufacturing sector and ignored an analysis of immigration and offshoring in the services sector. Given the growing importance of skill-intensive services trade, our paper takes a step in this direction. Second, unlike much of the literature, we study the interaction between immigration and offshoring in a dynamic general equilibrium model with a realistic skilled immigration policy setup.
- Economics