Essays on International Repercussions of Fiscal Policy and the Analysis of Migration Restrictions

Chapter 1 of my dissertation, "Fiscal Shocks and Cross-Border Spillovers", develops an open economy DSGE model to analyze the cross-border spillovers from expansionary shocks to government spending, lump-sum transfers and distortionary taxes on labor income, capital income and consumption. First, I present a new empirical fact regarding the negative relation between a country's output spillover from government spending shocks and its domestic government debt-to-GDP ratio. Second, I show that the model can rationalize this negative relationship in the presence of a fiscal consolidation regime, i.e. an increase in government debt gives rise to higher tax rates along with reductions in spending and transfers. The key mechanism is that a slower speed of fiscal consolidation is associated with larger accumulations of government debt and higher global interest rates, which dampens foreign activity. Finally, I find long-run spillover effects of fiscal shocks to be substantially different from short-run effects.;Chapter 2, "Government Spending Shocks and Default Risk in Emerging Markets", studies the effects of government spending shocks on default risk by developing VAR evidence based on a panel of 18 countries, and building a general equilibrium small open economy model. I find empirically that in response to a 10% government spending increase, (1) the real effective exchange rate appreciates by 1.0% and the current account to GDP ratio deteriorates by 0.0025 on impact; (2) external debt increases by an average of 3.5% in the year following the shock; and (3) the EMBI Global spread rises by an average of 25 basis points within two years following the shock, peaking at 132 basis points 14 quarters after the shock. The theoretical model performs well in matching the dynamics of the current account and external debt in response to the government spending shock. It also captures the rise in the sovereign spread. External debt rises on impact and stays positive for five periods before reverting back to its steady state. Hence default risk rises following increased government spending.;Chapter 3, "Migration Restrictions: Implications on Human Capital, Output, and Welfare", is joint work with Byoung Hoon Seok and Hye Mi You. This paper studies impacts of restrictions on rural-to-urban migration in China (Hukou restrictions) on human capital accumulation, efficiency loss from labor misallocation, and welfare. We build a general equilibrium model with an explicit migration decision of rural residents and present macroeconomic implications of the restrictions. The Hukou restrictions are incorporated into our model in the form of both a fixed migration cost and a lower wage for migrants relative to urban workers. By reducing either type of restriction, we quantify potential gains from efficient labor allocation and its welfare implications on both rural and urban residents. We find that a decline in both types of restrictions on migration by half increases total output and welfare by 1.4% and 2.5%, respectively. The policy change also strengthens the positive selection into migration in terms of education.