Three Papers in Applied Macro Policy

Abstract

The purpose of any applied macroeconomics study should be to provide actionable information to world governments on policy questions. This dissertation addresses two policies: the first chapter addressed the effects of a VAT on several macroeconomic indicators while revisiting its impact on government balance sheets in the second chapter, while the third chapter considers the effects of English language education. Value added taxes have become an important source of government funding in past decades, but little empirical work has been done on their macroeconomic impacts. Because the decision to implement a VAT is endogenous and includes variation from all observational units, not just relevant ones, regression methods analyzing the impact of the policy choice will yield biased estimates. To solve this problem, in my first chapter I model the VAT adoption decision for 192 countries using survival analysis. I then match adopters to non-adopters using propensity score matching. I find that VAT adoption is associated with an increase in growth and investment as well as and lower inflation and government spending as a share of GDP. In my second chapter, I use matching techniques to estimate the impact of a VAT on government debts and deficits. The tax is associated with falls in central government debt as well as variance and level of expenditure as a share of GDP. My third chapter estimates the macroeconomic impact of English skills and considers the utility of English language education. A common language lowers the transaction costs of international trade, and English is increasingly the language of international business. As a result, proficiency with English is often associated with higher incomes as well as increased employment, trade, and other economic opportunities and is promoted as a policy to improve the wellbeing of people in developed and developing countries alike. However it is not clear whether improved English abilities raise these variables or higher incomes allow one to invest more in better English abilities. Instruction in English is costly and may crowd out other studies or generate other outcomes which negate some of its benefits. I estimate the macroeconomic impact of English skills at the national level, as measured by English proficiency test results from the Test of English as a Foreign Language, TOEFL. I address the endogeneity problem by using the difficulty of learning English given one's native language as an instrumental variable and consistently find a strong effect of English abilities on income and net exports. However, there is no effect of English on FDI or Emigration, suggesting that the impacts of language may come from the changing nature of domestic industries rather than through remittances or foreign investment channels. The results of these studies should encourage holdout nations to consider adopting a VAT due to its positive effects on macroeconomic growth as well as government balance sheets, and to further explore the advantages of English proficiency. Future research will consider finer points of these policies and optimal implementation of a VAT and English language education.