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The effects of total factor productivity and export shocks on a small open economy with unemployment

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  • Schubert, Stefan F.

Abstract

The paper analyzes the dynamic effects of a supply side shock and a demand side shock, which hit an open economy with unemployment. The supply side shock is modeled as a reduction in total factor productivity, whereas the demand side shock is caused by a drop in exports. The model builds upon the small one-sector two-good open economy framework described in Turnovsky (2000, chapter 11.3). In contrast to this standard framework, in which Walrasian labor markets are assumed, search unemployment and wage bargaining are introduced, and unemployment results from time consuming and costly matching of vacancies with searching agents. Using a plausible calibration of the model, the dynamic adjustments of unemployment, output, and other economic key variables are analyzed. We find that a negative export shock primarily has effects on consumption and welfare, but not on unemployment and output, whereas the supply side shock leads to considerable responses of unemployment, output, consumption and welfare. If both shocks together hit the economy, the changes in consumption and welfare almost double.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 9 (September)
Pages: 1514-1530

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:9:p:1514-1530

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Total factor productivity shock Export shock Search unemployment Open economies;

References

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Cited by:
  1. Heer, Burkhard & Schubert, Stefan Franz, 2012. "Unemployment and debt dynamics in a highly indebted small open economy," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1392-1413.

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