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Essays on Production Structure and Economic Integration



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Smitkova, Lidia 


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.





Cavalcanti, Tiago


capital flows, international macroeconomics, structural change, trade


Doctor of Philosophy (PhD)

Awarding Institution

University of Cambridge
ESRC (1640104)
ESRC (via University of Oxford) (ES/J500112/1)
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