Essays in macroeconomics, international trade and the environment

Date
2008-01-01
Authors
Sikdar, Shiva
Major Professor
Advisor
Harvey E. Lapan
P. Marcelo Oviedo
Joydeep Bhattacharya
Committee Member
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Economics
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Economics
Abstract

This dissertation addresses the problem of optimal recapitalization of banking sectors after banking crises and analyzes the effect of trade liberalization on environmental policy and welfare in a strategic setting in the presence of transboundary pollution.;Government-financed bank restructuring programs, occasionally costing up to 50% of GDP, have commonly been used to resolve banking crises. In Chapter 2 analyze the Ramsey-optimal paths of bank recapitalization programs that weigh recapitalization benefits and costs under different financing options. In our model bank credit is essential, due to a working capital constraint on firms, and banks are financial intermediaries that borrow from households and lend to firms. A banking crisis produces a disruption of credit and a fall in output equivalent to those in developing countries affected by banking crises. Full recapitalization of the banking system immediately after the crisis is optimal only if international credit is available. One-shot recapitalization is not optimal with domestically-financed programs, even if the government has access to non-distortionary taxes. The welfare cost of a crisis is substantial: the equivalent permanent decline in the no-crisis steady state comsumption ranges between 0.51% and 0.65%, depending on the source of financing the recapitalization program.;In Chapter 3 analyze the effects of free trade on environmental policies in a strategic setting with transboundary pollution. Trade liberalization can result in a race to the bottom in environmental outcomes, which makes both countries worse off. In our model it is not the terms of trade motive, but the incentive, in a strategic setting, to reduce the incidence of transboundary pollution, that drives countries to relax domestic environmental policy. When command and control policies such as quotas are used instead of taxes, countries are unable to influence foreign emissions by strategic choice of domestic policy; hence, there is no race to the bottom. However, when permits are tradable across countries, unless pollution is a pure global public bad, there is a race to the bottom in environmental policy. In the free trade equilibrium, internationally nontradable quotas result in the lowest pollution level, while the relative ranking of pollution in the internationally tradable quota equilibrium and the tax equilibrium depends on the relative magnitudes of domestic and transboundary pollution and the relative slopes of the demand and supply schedules. The nontradable quota equilibrium strictly welfare-dominates the tax equilibrium.;Chapter 4 extends the model of the previous chapter to explicitly model differences between countries that may lead to trade in equilibrium. We analyze the effect of trade liberalization on pollution policy and welfare in the presence of both the terms of trade motives and the transboundary pollution effect. We find that, when countries use taxes to regulate pollution, the importer of the polluting good unambiguously lowers its tax due to trade liberalization, while the exporter of the polluting good reduces (increases) its tax if the transboundary pollution (terms of trade) effect dominates. It is possible for both countries to be worse off due to trade liberalization. When the only source of comparative advantage is a difference in preference towards pollution, then aggregate (world) welfare is higher under free trade as compared to autarky if countries use quotas to regulate pollution, but is lower under free trade relative to autarky if the policy instrument in both countries is a pollution tax.

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