Essays On Real Exchange Rate Volatility And Openness In International Trade PDF Download

"This dissertation consists of three independent chapters on International Economics. The first two chapters focus on how and why uncertainty affects international trade. The last chapter focuses on how reductions in trade barriers affect wage inequality. In the first chapter, I show that higher domestic volatility discourages exporters' investments in foreign market access, explaining the lack of involvement in international trade by developing economies. At the cross-country level, I find that country TFP volatility explains 40% of the relationship between trade and GDP per capita. Using Colombian micro-level data, I document that exporters with higher domestic sales volatility export less. New exporters expand relatively less over their life cycle in industries with higher domestic sales volatility. This dampening of the firm-level export expansion path is amplified in products with more variable markups. Motivated by these novel firm-level findings, I develop an international trade model with new exporter dynamics and variable markups that can account for the novel facts at the firm and the cross-country levels. These findings suggest that trade frictions calculated using static trade models reflect the interactions of domestic volatility and exporters' investment decisions to grow into foreign markets. Indeed my quantitative findings show that the volatility differences across countries are equivalent to a 30% higher trade cost in developing economies. These volatility differences account for 40% of the differential trade cost estimated by standard models of international trade. In the second chapter, I use a new time-varying measure of real exchange rate uncertainty (RERU) and find a negative relationship between RERU and international trade at the aggregate level. A one standard deviation increase in RERU is associated with a 5% drop in total trade over GDP. Using Colombian firm-level data, I document three firm-level facts consistent with the existence of a precautionary motive in international trade. When RERU increases, exporters: 1) reduce their export intensity, 2) are more likely to stop exporting, and 3) are less likely to start exporting to new markets. Additionally, I document that this behavior is mostly explained by exporters paying higher interest rates and facing higher shipping lags. These micro-level findings explain the cross-country results and contrast with the predictions from standard sunk cost models used in international trade. I show that incorporating firm-level debt default and international shipping lags into these standard models is enough to reconcile these models with the novel facts. In the new model, an increase in the RERU increases the probability of an exporter ending up in a financially vulnerable situation. To hedge against this risk, exporters respond by increasing markups or quitting the export market, generating a drop in aggregate exports through both the intensive and extensive trade margins. Quantitatively, the extended model predicts that a one standard deviation increase in RERU generates a drop in total exports of around 6%, consistent with the aggregate findings. In the third chapter, we use detailed employer-employee data from Spain that goes from 1987 to 2004 to understand how international trade affects the wage distribution across workers. Using a new instrumental variable approach to disentangle trade openness's effects on the distribution of income and wages, we document that an increase in local trade exposure reduces wage inequality. Furthermore, we show that this result is associated with changes at the within-industry and within-firm levels. At the within-industry level, we show that trade openness reallocates workers towards small firms and low-skilled jobs. While at the within-firm level, we find that small firms increase their labor intensity and employment, while larger firms reduce both in response to changes in trade openness. These changes are consistent with an increase in the relative demand for low-wage and low-skill workers"--Pages ix-xi.