Fiscal policy, trade and growth: A dynamic comparative advantage approach

In this dissertation I study both in and out of steady state effects of different public policy programs in the context of two-sector open economy model with endogenous growth. The structure of the model allows a focus on the pure effects of trade and growth without introducing the usual channels of transmission of trade effects on growth such as: research and development, scale effect and technological diffusion. Thus growth effects of trade policies and capital income taxation operate through the same comparative advantage mechanism exploited in the static models of trade.In the first chapter I focus on steady state effects of fiscal policy programs. As the results suggest both import and export taxation and capital income taxation introduced by either country lead to a reduction in the world balanced growth rate, while an export subsidy increases it however, the effect of an export subsidy on growth may be different depending on the source of financing the export subsidy. In particular, financing an export subsidy with capital income taxation will lead to an overall reduction in the world balanced growth rate, as the negative effects of capital income taxes dominate the positive growth effects of an export subsidy.In the second chapter of this dissertation project I study transitional dynamics of the model introduced in chapter 1. The structure of the model considered in the first chapter leads to a completely new pattern of transitional dynamics, therefore in this chapter I focus on the study of transitional dynamics in the absence of fiscal policy programs. There are four possible cases of transitional dynamics depending on the directions of deviations of factor ratios from their steady states. In two of these cases countries stay under autarky along the transition and open to trade only on the balanced growth path (BGP). In the remaining two cases countries trade not only on the BGP but also along the transition. In the last two cases the complexity of the solution arises from the fact that the world relative price depends on control and state variables of both countries, leading to five dimensional system of dynamic equations. As high dimensionality of this dynamic system doesn't allow for an analytical solution I proceed with a model simulation exercise where I simulate the transitional behavior of this world economy under chosen values of parameters.In the third chapter of my dissertation I introduce public policy programs to the study of transitional dynamics of the model. In the first two cases of transitional dynamics countries trade only along the BGP, therefore I consider transitional effects of domestic policy programs, such as capital income taxation and consumption taxation under scenarios of those two cases of dynamics. In the remaining two cases I consider effects of all policy programs introduced in the first chapter of my dissertation. Overall, different policy programs don't lead to substantial effects on the pattern and duration of transitional dynamics. Some changes in the patterns of assymptotic adjustment arise in the presence of consumption taxes which can be explained by the argument that consumption taxes lead to distortions in the attempt of households to smooth their consumption over time.