Essays on International Trade and Finance

Abstract

The thesis consists of four individual studies on international trade and finance, unified by a common focus on how external forces and domestic fundamentals jointly shape economic outcomes in open economies.

The first essay examines the trade and financial channels of the exchange rate through the lens of the Dominant Currency Paradigm (DCP). On the trade front, while the DCP posits limited export responses to exchange rate depreciation, its implications for the extensive margin remain underexplored. On the finance side, given exporters' reliance on external finance, the paper examines whether exchange rate fluctuations affect exports through banks' foreign-currency exposure. Using export data for 157 economies from 1996 to 2019, the paper finds: (i) a positive relationship between exchange rate depreciation and exports only at the product-extensive margin; (ii) when the net foreign asset exposure of banks is positive, an appreciation contracts exports, whereas depreciation boosts exports only at low levels of foreign currency exposure; and (iii) this asymmetry can be attributed to the global financial cycle. The results underscore the diminishing relationship between exchange rate depreciation and exports and shed light on how these movements can affect banks' balance sheets and shape export outcomes.

The second essay investigates the dynamics and determinants of exporter survival in Australia. It documents three salient features of Australian exporters: a high exit rate, limited re-entry following exit, and a disproportionate contribution of incumbent firms to total exports. Motivated by the view that certain ex ante characteristics can differentiate high-performing exporters, the paper applies machine learning techniques to predict exporters' survival. It runs a horse race among several machine learning models, identifies random forest as the best performer, and interprets it using the Shapley values and regression framework. The results reveal that export market survival is a function of both firms' ex ante characteristics and strategic complementarities among exporters. The findings i) shed light on the determinants of exporter survival; ii) capture high-dimensional interaction among predictors; iii) offer policymakers insights into identifying an efficacious way of targeting export promotion activities.

The third essay builds on the Heckscher-Ohlin-Vanek (HOV) model and treats intangible capital as a source of comparative advantage in international trade. Applying the gravity model to a dataset of 24 OECD countries, the results reveal that countries with relatively abundant intangible capital tend to export more from sectors that make intensive use of it. Additionally, high-skilled labour has a similar impact, underscoring the importance of human capital in managing complex production processes. Government policies should focus on enhancing business environments, including the provision of digital infrastructure, to foster the expansion of intangible capital and facilitate countries' engagement in new trade patterns, such as service trade.

The final study investigates the impact of remittances on tax revenue collection and the broader economy. Using a Structural Vector Autoregression (SVAR) framework and quarterly data from 2005 to 2020 for Nepal, the paper finds that i) a shock to remittance growth leads to a transient rise in the growth rate of Nepal's indirect tax revenue (IDTR); ii) the domestic GDP growth rate has a stronger influence on IDTR than remittances; iii) the rise in tax revenue is primarily driven by import-based consumption; iv) remittances respond positively to foreign GDP growth shocks; v) remittance growth has a limited effect on domestic GDP growth in the short-term. The results underscore the fiscal implications of remittance flows in remittance-dependent countries and the importance of strengthening the domestic tax base for a sustainable revenue system.