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The Virtues of Flecibility: Import Dependence and External Shocks


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  • Dennis, B.N.
  • Iscan, T.B.
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    This paper considers how the structure of an open economy determines its flexibility in responding to external shocks. Inter- and intrasectoral reallocation of both expenditures and factors of production are shown to mitigate the consequences of a severe terms-of-trade shock. We demonstrate that the degree of flexibility reulting from these reallocative effects depends partly on intrasectoral differences in import dependence. The paper introduces sectoral heterogeneity by allowing the relative shares of labour and imported inputs used in production to differ across monopolistically competitive industries. Flexibility is shown to be reduced by:(i) low technological diversity, which constrains sectoral heterogeneity and hence the scope of factor reallocation, and (ii) high market power, which curbs expenditure subsitution across different consumption goods in the wake of a shock. The empirical implications of the model are demonstrated using sectoral data from Mexico.

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    Bibliographic Info

    Paper provided by Dalhousie, Department of Economics in its series Department of Economics at Dalhousie University working papers archive with number 2000-6.

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    Length: 40 pages
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:dal:wparch:2000-6

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