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THREE ESSAYS ON MACROECONOMICS AND DEVELOPMENT

Abstract
This dissertation is a collection of essays that relate, in different forms, macroeconomic policies to economic development. Essay 1 provides evidence that austerity shocks have longrun negative effects on GDP. Besides addressing the important gap in the growing fiscal research regarding the short time horizon of the estimations, the paper analyzes two other important assumptions made in the literature regarding the (i) symmetry of episodes of fiscal expansion and contraction and (ii) uniformity of fiscal multipliers for different sizes of shocks. We use narrative fiscal shocks and propensity score reweighting in a local projections setup to account for the potential endogeneity of austerity policies and the non-linearity of its effects over time. The estimation is also adapted to eliminate the bias that emerges when multiple shocks might occur within the time horizon of interest. Our baseline results show that contractionary fiscal shocks larger than 1.5% of GDP generate a negative effect of more than 3% on GDP even after 15 years. The drop in GDP reaches 5.5% for fiscal contractions larger than 3%. Evidence is also found linking austerity with smaller capital stock in the long-run. The results are robust to different fiscal shocks datasets, the exclusion of particular countries and shocks, alternative estimation methods, and the use of cleaner controls. Besides understanding the consequences of this particular policy, the results contribute to the broader discussion on the long-run effects of demand by suggesting that such shocks might permanently affect the economy. Essay 2 reviews different literature strands and performs an empirical test to evaluate how capital ownership, particularly its nationality, might affect long-run economic development. Our results indicate that low and middle-income countries with larger foreign capital stock in 1980 had lower economic growth over the next 39 years. The estimations also indicate that these economies developed a less specialized export basket, which became relatively more concentrated in low-tech goods. The results are inverted to high-income economies, for which the effects are positive on GDP growth and export specialization and complexification. The results are in line with the evidence that countries can benefit from foreign investment only if they have sufficiently developed ‘absorptive capabilities’ (e.g., financial markets and human capital). The results can also be interpreted in light of theoretical and empirical evidence that foreign capital might reinforce static comparative advantages in developing economies, particularly in middle-income ones. Essay 3 is a paper co-authored with Peter Skott (published at Industrial and Corporate Change; Martins and Skott (2021)). The article presents a model in which distributional conflict and cross-sectoral interactions between demand and supply side forces determine inflation in developing countries. We show that the standard macroeconomic policy recommendations of inflation targeting and balanced budgets (i) increase volatility by amplifying external shocks and (ii) can lead to premature deindustrialization. The recent Brazilian experience is used to illustrate the argument.
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