Essays on International Economics

Abstract

This dissertation consists of three chapters. The first chapter studies the impact of oil discoveries on default risk. I use data of giant oil field discoveries to estimate their effect on the spreads of 37 emerging economies and find that spreads increase by up to 530 basis points following a discovery of average size. I develop a quantitative sovereign default model with capital accumulation, production in three sectors, and oil discoveries. Following a discovery, investment and foreign borrowing increase. These choices have opposite effects on spreads: borrowing increases them and investment reduces them. The discovery also generates a reallocation of capital away from manufacturing and toward oil extraction and the non-traded sector, which is the so-called Dutch disease. This reallocation increases the volatility of tradable income used to finance foreign debt payments, which undermines the effect of investment on spreads. The second chapter studies an environment in which the Dutch disease amplifies an inefficiency in private sectoral investment that affects the government's ability to borrow from abroad. The model features production in two intermediate sectors: tradable manufactures and a non-tradable good. In addition, the economy receives an endowment of a tradable commodity. The household makes investment decisions in both manufacturing and non-traded sectors and does not internalize how these choices affect the volatility of total tradable income. The government does not have enough instruments to fully manipulate the household's investment choices, which implies that investment allocations are inefficient from the point of view of a social planner. The third chapter studies how the informativeness of the exchange rate affects the sensitivity of prices to nominal depreciations. In an environment with imperfect information, the exchange rate is a signal of the state of the economy and thus relevant for pricing decisions, even if it does not affect costs. This gives rise to a policy trade-off: a currency intervention that reduces the level of a depreciation also reduces exchange rate volatility and, therefore, increases its precision as a signal. This increases the elasticity of prices with respect to the exchange rate. Overall, the effect of such currency interventions on inflation is ambiguous: on one hand they reduce the magnitude of the shock and, on the other, they increase the responsiveness of firms when adjusting their prices. I use policy changes in Mexico to identify an increase in the precision of information provided by the Central Bank. Holding everything else constant, this increase accounts for 4 out of a 12 point drop in the elasticity of prices with respect to the exchange rate.