The Making of a Monetary Union: Evidence from the U.S. Discount Market 1914-1935

The decentralized structure of the Federal Reserve gave regional Reserve banks a large degree of autonomy in setting discount rates. This created repeated and continued periods of non-uniform discount rates across the 12 Federal Reserve districts. Commercial banks did not take full advantage of these differentials, reflecting the effectiveness of qualitative restrictions on the use of discount window liquidity in limiting the geographical movement of funds. While the choice of regional autonomy over complete financial integration was reasonable given the characteristics of the U.S. monetary union in the interwar period, the Federal Reserve failed to use this autonomy to stabilize regional economic activity relative to the national average. The diagnosis that the costs of decentralization outweighed the gains from regional differentiation motivated reforms that standardized and centralized control of Reserve bank discount policies.

Supply-Side Policies in the Depression: Evidence from France

The effects of supply-side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time-series and cross-sectional evidence that these supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one-sector new Keynesian model and with a medium scale, multi-sector model calibrated to match our cross-sectional estimates. We conclude that the new Keynesian model is a poor guide to the effects of supply-side shocks in depressed economies.

Fiscal Policy in the Depression: Evidence from Digging Holes and Filling Them

I use historical data on military spending on a strategic defense system - the Maginot Line - during the interwar period in France to estimate the effect of fiscal policy in a depressed economy. Planning for the construction of the defense system took place in the 1920s, while actual spending mostly occurred in the 1930s. Factors such as the natural local terrain, and the location of military threat generated variations in spending across space and time that were not related to current or expected levels of economic activity in these areas. I exploit these variations to estimate a local government spending multiplier that controls for aggregate shocks and aggregate policy, such as changes in distortionary taxes and aggregate monetary policy. I find a local multiplier of 1. Given the likely bias introduced by the use of fiscal data to proxy local economic activity and by the \textit{ad-hoc} assumptions made to reconstruct a precise geographical allocation of border fortification spending, I see my result as evidence that the true local government spending multiplier is at least equal to 1.

In the advent of WWII, artificial trade barriers had reached their 20th century peaks. Drastic protectionist measures, aggravated by a worldwide economic depression, led to the significant decline in international trade which in effect further prolonged the economic crises. However, after the end of WWII, among other serious measures taken to promote international economic integration, the General Agreement on Tariffs and Trade (GATT) was put into effect. Since 1948, the GATT has been effectively used as an instrument to gradually and substantially reduce international trade barriers. These reductions were implemented after multilaterally agreed upon reciprocal concessions were negotiated and signed during the 8 different Rounds that the GATT successfully facilitated. While the primary objective of liberalizing trade is at the essence of these rounds, what negotiators negotiate about in how to share the gains from trade that ensue is less apparent.

Furthermore, the GATT as an instrument has been functioning under the auspices of the World Trade Organization (WTO) since 1995. With more countries involved and more varied tradable outputs to negotiate over, the magnitude of the pareto improving gains from trade is increasingly substantial. Since its inception, the WTO has put tremendous effort and resources to continue the process of trade liberalization. However, the Doha Round, the only WTO Round, has yet to show any substantial progress after 12 years since it began in 2001. Why member states fail to reach an agreement has yet to be answered.

In this dissertation, I shed some light on both questions. First, using a select number of developing countries I provide an empirical support to the terms of trade theory; which argues that negotiators negotiate and enter into trade agreement in order to escape from a terms of trade prisoner's dilemma. Negotiators agree to reciprocally internalize externalities they impose on each other in order to create a more efficient international trade environment.

Secondly, I argue that in light of the participation of a larger number of asymmetrically informed member states dealing with a much greater scope of issues that have to all be settled at once, the delay in the Doha Round completion can be explained by negotiating parties engaging in a war of attrition. A negotiator who does not know its trading partners' cost of waiting and valuation of outcome is more likely to attempt to wait it out until all trading partners concede. Consequently, the group as a whole is left with an inefficient amount of delay that could potentially be alleviated by an imposition of a strict deadline by which time an agreement has to be reached. Finally, I provide some empirical evidence to show how the war of attrition story is aggravated by the sudden proliferation in the use of Regional Trade Agreements (RTA) since the early 1990s.

This dissertation consists of three essays about two interconnected aspects of globalization: global trade integration and global imbalances. The first two essays focus on containerization, a technology that played a pivotal role in twentieth century global trade integration. Containerization, an intermodal system of door-to-door shipping, replaced traditional breakbulk methods of shipping and enabled the swift movement of cargo across the world. In the first essay, I present evidence on the historical evolution of containerization. For that purpose, I constructed a comprehensive dataset with information on the timing and intensity of adoption of containerization for 147 countries. I find that adoption moves in an S-shaped pattern, while usage moves more slowly and linearly. Additionally, I identify four stages in the historical diffusion of containerization, based on my data analysis and on historical and anecdotal sources: innovation and early adoption (1956--1965), internationalization (1965--1974), worldwide adoption and intensification of use (1975--1983), and late adoption and growth of usage (1984--2008). These findings guide the construction of a theoretical framework for understanding the determinants of adoption and usage of containerization. The theoretical model focuses on firms' choices between two transportation technologies (containerization and breakbulk) and on the decision by the country's transportation sector to construct, maintain and operate a container port (adoption). Changes in fixed costs and network effects generate the patterns observed in the data.

In the second essay, I investigate the determinants of adoption and usage, using a two-step procedure which is derived from the theoretical model presented in the previous essay. The empirical results, which are consistent with the theoretical predictions, show that fixed costs and network effects are the main determinants of usage of containerization. Fixed costs affect containerized trade as a result of the spread of leasing companies and changes in the domestic transportation network. Network effects operate through network size, network usage, and network income. With regards to adoption, my results show that expected future usage of containerization, institutions, a country's size in terms of trade and geographical area, and trade with Australia and the United Kingdom are the main determinants. Trade with the United States, surprisingly, has no effect.

In the third essay, co-authored with Barry Eichengreen, I turn to the other aspect of globalization, global imbalances. First, we extend the two-country model presented in Obstfeld and Rogoff (2007). and investigate the exchange-rate implications of several rebalancing scenarios. We find that it matters tremendously how many countries are on the other side of the US current account adjustment; whether surplus countries like China, as they continue to grow, concentrate their investment in productive capacity in traded or nontraded goods; and the nature of structural reforms that change spending patterns in the US and abroad. Second, we investigate the likelihood of a sustained reduction in global imbalances. While previous literature has provided evidence on the circumstances under which large deficits come to an end, we add evidence on how chronic current account surpluses are also eliminated. We find that large current account surpluses tend to be eliminated when they have been allowed to rise previously to exceptionally high levels, when the economy doing the reducing is less open (smaller political resistance to resource allocation), when an earlier period of rapid growth comes to an end (presumably both moderating the rate of growth of the capacity to produce tradable goods and rebalancing demand toward domestic goods), after reductions in budget surpluses, and in the case of oil-exporting economies, when oil prices are unusually low.