Essays on globalization.

Abstract

This dissertation consists of two essays. The first essay analyzes the labor market effects of import competition in the U.S. Recent empirical research indicates, in contrast to standard trade theory, that trade and foreign competition negatively impact some locations by worsening labor market outcomes such as unemployment. I extend and confirm this work using unique data on the U.S. Trade Adjustment Assistance (TAA) programs since 1983. I find that locations that face more foreign competition have higher job destruction rates, lower job creation rates, and thereby higher unemployment rates. I introduce a simple trade model with unemployment and segmented local labor markets facing different degrees of foreign competition. Import competition has a correlated effect on job destruction and job creation because the most vulnerable locations to foreign competition have lower productivity. Despite large reductions in employment rate in the worse hit local labor markets and in contrast to an exogenous increase in foreign productivity, an unexpected trade liberalization yields aggregate welfare gains in the model calibrated to the U.S. The second essay studies the accumulation of foreign reserves in emerging economies. Emerging economies, unlike advanced economies, have accumulated large foreign reserve holdings. We argue that this policy is an optimal response to an increase in foreign debt rollover risk. In our model, reserves play a crucial role in reducing debt rollover crises ("sudden stops''), akin to the role of bank reserves in preventing bank runs. An unexpected increase in rollover risk leads to a global rise in sudden stops, prompting emerging economies to update their priors about the risk they face. We show that a global increase in the rollover risk faced by emerging economies explains the outburst of sudden stops in the late 1990s, the subsequent increase in foreign reserves holdings, and the salient resilience of these countries to sudden stops ever since.