Globalization and financial crisis : a dynamic approach

• Main Author: Gravier-Rymaszewska, Joanna
• Other Authors: Joseph Dennis Alba
• Format: Theses and Dissertations
• Language: English
• Published: 2013
• Subjects: DRNTU::Social sciences::Economic theory::Macroeconomics; DRNTU::Social sciences::Economic development::Europe; DRNTU::Social sciences::Political science::International relations; DRNTU::Social sciences::Economic theory::Public finance
• Institution: Nanyang Technological University

This dissertation investigates some of the outcomes of globalization, exploring the effects and transmission of shocks between countries. It consists of three essays interconnected by the topic of globalization and economic crises. The first essay studies one of the most prominent outcomes of globalization, global production markets, and their roles in transmitting shocks. A two-country, three-sector Dynamic Stochastic General Equilibrium (DSGE) model with offshoring is proposed and simulated for an open economy, inspired by the paper of Bergin P. & Feenstra R. & Hanson G., (2011) ‘Volatility due to offshoring: Theory and evidence’, Journal of International Economics, vol. 85, no 2, 163-173. The model implements two country-specific sectors and a common multinational sector with home and foreign producers where domestic multinational producers can reallocate production abroad. It is found that offshoring has generally positive effects for the home country, raising output and mitigating inflation, and these favorable effects are amplified by the ‘export’ of volatility that comes along. However, there exists a threshold beyond which the effects of offshoring become negative for the domestic economy. The study also establishes an interest rates channel of offshoring. The second essay aims at showing that production reallocation is a substantial phenomenon within the European Union and studies its dynamics. The extensive and intensive margins on import, export and labor are estimated, revealing that offshoring is a channel of adjustment to shocks in Europe. The DSGE model is calibrated to fit Western and Central European data. Simulations confirm most of the qualitative and behavioral findings from the first essay; globally, offshoring amplifies the transmission of economic shocks across borders. The results reveal the existence in the European context of an optimal level of offshoring for which volatility is minimal. Offshoring is also found important for the labor market, as it contributes to job creation at home and abroad, but also to maintaining the cross-country wage gap. The third essay tackles the issue of the effects of globalization spillovers from the developed world to developing countries, by addressing the challenges of international aid in times of financial crisis. In the presence of crisis, developing countries rely more crucially on aid, whereas developed countries reduce aid volumes. This study designs a theoretical framework of international aid provision based on a consumption model where donors consume international aid indirectly. The panel vector autoregression (PVAR) analysis is conducted from the yet unexplored standpoint of Official Development Assistance donors, and exposes the financial sources of aid volatility in the context of crisis. The main finding is that crises affect aid budgets and their trends. Financial volatility is found to decrease aid and to introduce some uncertainty to aid through fluctuations of its budget. The analysis establishes evidence that aid decisions are not purely economic, but also determined by internal political factors of donor countries: center parties appear more driven by economic determinants, while left and right-wing parties act in accordance with their ideological views.