In this dissertation, I present three chapters that study the linkages between the structural makeup of economies and the process of trade- and financial liberalization.

In the first chapter I examine the role of trade and external deficits in explaining the patterns of structural change in twenty developed and developing economies between 1965 and 2000. First, for each country, I break down the time series of manufacturing value added share into a secular trend and a trade-induced deviation from the trend. I show that national differences are in large part due to trade. Second, I investigate changes in sectoral productivity, trade costs and trade deficits as the driving forces behind the patterns in the data. To do this I build a multi-sector Eaton and Kortum (2002) model and simulate the effects of different shocks on the manufacturing value added shares in the sample. While calibrating the model, I develop a novel method of identifying trade cost- and productivity shocks, which makes use of symmetry restrictions on sectoral trade cost shocks. I calibrate the model at a two-digit level of disaggregation, which permits me to study not only the changes in the manufacturing share, but also its composition at a sub-sectoral level. I find that open economy forces are responsible for 32% of the observed change in the manufacturing shares in my sample, and for 39% if the composition of the manufacturing sector is taken into account. Focusing on individual shocks, I show that for the aggregate manufacturing share, trade cost- and aggregate trade deficit shocks played the biggest role, whereas the productivity shocks mattered more in driving the composition of manufacturing.

In the second chapter, I study financial liberalization between economies that differ in their overall competitiveness. I first show that if firms compete oligopolistically, then competitiveness --- relatively low aggregate unit costs of production --- is a feature of an economy with a fatter tailed productivity distribution and relatively more very large --- `superstar’ --- firms. Embedding this setup in a two-country model with heterogeneous agents and non-homothetic saving behaviour, I show that if the home is more competitive, then: (1) it enjoys a higher aggregate profit rate than foreign; (2) its autarkic interest rate is lower than that in foreign; (3) should the two economies undergo financial liberalization, the capital will be flowing from home to foreign; (4) if one of the sectors is non-tradable, the capital inflows push up the wages in foreign, leading to further losses of competitiveness and to current account overshooting.

In the third chapter, I calibrate the quantitative version of the model developed in Chapter 2 to eight European economies on the eve of the Global Financial Crisis. I show that the competitiveness gap can explain 27% of variation in the current account imbalances incurred in the period. I conclude by discussing policies for rebalancing.