International Borrowing, Specialization, and Unemployment in a Small Open Economy
AbstractThe authors show that an increase in international borrowing increases specialization and unemployment in a small open economy that is subject to terms-of-trade risks. The economy has a production advantage in the export sector. However, the size of the export sector is limited by the available funds. To insure workers against income fluctuations arising from terms-of-trade risks, firms in the export sector offer workers a stable wage rate with the possibility of unemployment. An increase in international borrowing increases specialization in the export sector, which leads to higher unemployment when the terms-of-trade shock is bad. A state-contingent price subsidy can reduce unemployment without inefficiently reducing specialization. The results are robust to the introduction of risk-averse firms. Copyright Blackwell Publishing Ltd 2004.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Review of International Economics.
Volume (Year): 12 (2004)
Issue (Month): 1 (02)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576
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- Lafrance, Robert & Osakwe, Patrick & St-Amant, Pierre, 1998. "Evaluating Alternative Measures of the Real Effective Exchange Rate," Working Papers 98-20, Bank of Canada.
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