The Virtues of Flexibility: Import Dependence and External Shocks
AbstractThis 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 resulting from these reallocative effects depends partly on intrasectoral differences (i.e., sectoral heterogeneity) 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 (i.e., low market competition), which curbs expenditure substitution 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 InfoPaper provided by Dalhousie, Department of Economics in its series Department of Economics at Dalhousie University working papers archive with number eshocks.
Length: 40 pages
Date of creation: 24 Aug 2000
Date of revision:
open economy macroeconomics; heterogeneity; terms of trade; resource reallocation;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael W. Klein & Scott Schuh & Robert K. Triest, 1999.
"Job creation, job destruction, and the real exchange rate,"
99-11, Federal Reserve Bank of Boston.
- Klein, Michael W. & Schuh, Scott & Triest, Robert K., 2003. "Job creation, job destruction, and the real exchange rate," Journal of International Economics, Elsevier, vol. 59(2), pages 239-265, March.
- Michael W. Klein & Scott Schuh & Robert K. Triest, 2000. "Job Creation, Job Destruction, and the Real Exchange Rate," NBER Working Papers 7466, National Bureau of Economic Research, Inc.
- Benjamin Dennis & Talan Iscan, 2002. "Terms of Trade Risk," Department of Economics at Dalhousie University working papers archive totrisk, Dalhousie, Department of Economics.
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