Essays on macroeconomic development policies




Kuruc, Kevin J.

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This dissertation examines the policies of developed countries and international financial institutions on developing countries. The first chapter estimates the output effects of IMF loans during acute macroeconomic crises. Using the universe of financial crises from 1975-2010, I study whether recovery dynamics differ across crises that do and do not receive IMF intervention. I condition on the type of financial crisis, employ a new estimator to find the most relevant controls units—the synthetic control method—and use forward looking variables to address the different selection issues associated with IMF lending. In contrast to much of the existing literature, I find that IMF lending has large short-run effects. Countries that receive an IMF loan have GDP that is, on average, 1-2 percent larger in the 2-3 years following the onset of a crisis than what is predicted by their synthetic controls. Consistent with either a liquidity effect or policy advice specific to managing a crisis, the difference fades in the medium run. Likewise, I find the recovery effects are largest in countries with weak institutions: places where policy advice and an “international lender of last resort” may be most useful. The second chapter (joint with Melissa LoPalo, Dean Spears and Mark Budolfson) asks how costly climate change will be for India. We first draw on microeconometric estimates of the impacts of heat waves on important social indicators. This analysis demonstrates that India is uniquely climate vulnerable given the high levels of humidity in south Asia. Then, using a modified regional Integrated Assessment Model (RICE, Nordhaus (2010)), we perform a welfare exercise in which we quantify total future damages in terms of consumption equivalent near-term losses: how much would consumption need to be reduced for the next 20 years to be equivalently bad (in a welfare sense) as projected climate damages? We find damages are as costly for welfare as a near-term humanitarian crisis (30% GDP per capita reduction over 20 years), but that the relationship is convex: if India can spur even minimal international coordination we estimate there would be large social returns. The third chapter presents a quantitative analysis of the macroeconomic characteristics and performance of fragile states, especially in the context of their engagement with the International Monetary Fund. It finds, among other things: (i) fragility may be a more fluid state than previously documented; (ii) while in fragile states GDP growth is more volatile, it is only slightly slower, on average, than growth in nonfragile states; (iii) fragile states’ GDP appeared to grow about 1 percentage point faster following approval of an IMF lending arrangement; and (v) foreign aid flows to fragile states increased by about 60 percent in the years following approval of IMF program engagement, with or without IMF financing (no such increase was observed for non-fragile states), illustrating the IMF’s catalytic role. While this analysis provides a positive overall assessment of the IMF’s role in fragile states, care must be exercised in interpreting the results, especially concerning causality



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