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International Borrowing, Specialization, and Unemployment in a Small Open Economy

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  • Patrick N. Osakwe
  • Shouyong Shi

Abstract

The 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.

Suggested Citation

  • Patrick N. Osakwe & Shouyong Shi, 2004. "International Borrowing, Specialization, and Unemployment in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 12(1), pages 41-59, February.
  • Handle: RePEc:bla:reviec:v:12:y:2004:i:1:p:41-59
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    References listed on IDEAS

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    1. Robert J. Barro, 2012. "Inflation and Economic Growth," CEMA Working Papers 568, China Economics and Management Academy, Central University of Finance and Economics.
    2. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, pages 121-144.
    3. Xavier Sala-i-Martin, 1995. "Transfers, social safety nets and economic growth," Economics Working Papers 139, Department of Economics and Business, Universitat Pompeu Fabra.
    4. K. Mc Morrow & W. Röger, 2002. "EU pension reform - An overview of the debate and an empirical assessment of the main policy reform options," European Economy - Economic Papers 2008 - 2015 162, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    5. Xavier Sala-I-Martin, 1997. "Transfers, Social Safety Nets, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 81-102, March.
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    Cited by:

    1. Lafrance, Robert & Osakwe, Patrick & St-Amant, Pierre, 1998. "Evaluating Alternative Measures of the Real Effective Exchange Rate," Staff Working Papers 98-20, Bank of Canada.

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