| My dissertation examines the impact of instability in trade policies on individual plant's investment decision and its aggregate implications.; The first chapter argues that, for a county importing most of its capital goods, a temporary increase in import tariffs has a large negative impact on investment and productivity. I closely examine the Chilean experience for the period of 1980–1996. Starting from 1983, the Chilean government uniformly increased import tariffs. This tariff increase led to a significant, but temporary, increase in the price of imported goods. To quantitatively assess the importance of import price changes in explaining investment and productivity, I develop and estimate a structural dynamic optimization model of machine replacement using the plant-level panel data for 1980–1996. The estimated structural model replicates the observed investment patterns well both at the aggregate level and at the plant level. The counter-factual experiment indicates that the Chile would have recovered from the economic crisis of 1982–1983 at the substantially faster rate if its government did not impose higher tariffs in the mid 1980s.; The second chapter develops a machine replacement model with putty-clay technology in the presence of factor price and demand uncertainty. Uncertainty in factor prices and demand conditions may delay the timing of endogenous machine replacement because of the irreversibility of factor intensity choice and of the decision to upgrade. As an empirical application, I examine the effect of exchange rate volatility on investment and factor intensity of imported materials based on plant-level Chilean manufacturing panel data for 1980–1986. The negative impact of exchange rate volatility is found to be larger among plants with a higher ex ante elasticity of substitution, suggesting a potential role of the irreversibility of factor intensity in explaining the volatility effect. |
