Trade, democracy, and economic growth: Four essays in dynamic economics

This thesis contains four essays. In essay one we test empirically whether there is a relationship between average growth rates and volatility of growth rates. This relationship has important policy implications depending critically on its sign. Following Ramey and Ramey (1995) a wide consensus was that it is negative. We find that this result is not robust to definition of growth rates, or sample composition. We show that the use of log approximation for growth rates, as in Ramey and Ramey, creates a strong bias towards finding negative relationship. Our empirical analysis suggests no consistent relationship between the variables.; In the second essay we first find that less democratic countries experience more growth volatility, even when controlling for political instability. To explain this observation we use a dynamic model in which democracy is parameterized by the fraction of people who are in power. The government maximizes utility of the group in power by collecting income tax from everyone, and giving transfers to the favored group only. We solve this model numerically and find that, when the group in power is small relative to population, the optimal policy amplifies exogenous volatility. Thus in the model, as in the data, less democratic countries are more volatile.; In essay three we consider a small economy in a dynamic Heckscher-Ohlin model with uncertainty. We show that when trade is balanced period-by-period, the per-capita output of a small economy converges to an invariant distribution that is independent of the initial wealth, and the small economy diversifies in at least some periods. These results contrast with permanent specialization and non-convergence arising in deterministic dynamic HO models. The importance of market incompleteness, due to balanced trade restriction, is illustrated through an analytical example. Numerical simulations show that the speed of convergence is increasing in the size of the shocks.; In essay four we prove existence of a minimum positive fixed point for the capital policy function under more general assumptions than in Brock and Mirman (1972), solving a problem which had been prominent in the stochastic growth literature.