2011 Theses Doctoral

Four Essays in International Economics

Du, Qingyuan

Developing countries are more likely than developed countries to pursue a fixed exchange rate regime, yet this pattern is not directly predicted by conventional theories of optimum currency area. The first Chapter proposes a new theory of exchange rate regime choice---different from the policy maker's credibility argument in the "fear of floating" theory---that stresses the roles of both stage of economic development and labor market frictions. In general, for a typical developing country with low labor productivity and high labor market frictions, a fixed exchange rate regime would yield a higher level of welfare than a floating regime as the former generates more export revenue. The opposite is true for a country with high labor productivity or a more flexible labor market. We provide empirical evidence that is consistent with the key predictions of the theory. The second chapter investigates some new hypothesis of the high savings rates and current account surpluses in countries like China. Large savings and current account surpluses by China and other countries are said to be a contributor to the global current account imbalances. In this chapter, we propose a theory of excess savings based on a major transformation in many of these societies, namely, a steady increase in the surplus of men relative to women. We construct an OLG model with two sexes and a desire to marry. We show conditions under which an intensified competition in the marriage market can induce men to raise their savings rate, and produce a rise in both the aggregate savings and current account surplus. This effect is economically significant if the biological desire to have a partner of the opposite sex is strong. A calibration of the model suggests that this factor could generate economically significant current account responses, or between one third and a half of the actual current account imbalances observed in the data. In the third chapter, we analyze how the social structual change--the rise in the sex ratios--may affect the real exchange rate. We find that a rise in the sex ratio, in theory, can simultaneously generate a decline in the real exchange rate (RER) and a rise in the current account surplus. We demonstrate this logic through both a savings channel and an effective labor supply channel. In this model, a low RER is not a cause of the current account surplus, nor is it a consequence of currency manipulations. Empirically, those economies with a high sex ratio tend to have a low real exchange rate, beyond what can be explained by the Balassa-Samuelson effect, financial underdevelopment, dependence ratio, and exchange rate regime classifications. Once these factors are accounted for, the Chinese real exchange rate is estimated to be undervalued by only a relatively trivial amount. The last chapter studies the entrepreneurial activities in countries like China who have experienced a severe rise in the pre-marriage age cohort's sex ratio. In this chapter, we present a theoretical model and find that, when the sex ratio is large, a rise in the sex ratio will induce men to take the risk and pursue the high returns, which leads to an increase in the entrepreneurial activities in the economy. In an open economy model with two sectors, a risky sector and a risk free sector, we show that a country with a very skewed sex ratio is more likely to have a comparative advantage in the risky sectors. We provide empirical evidence that is consistent with the theoretical predictions.