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The Virtues of Flexibility: Import Dependence and External Shocks

Author

Listed:
  • Benjamin Dennis

    () (Department of Economics, University of the Pacific)

  • Talan Iscan

    () (Department of Economics, Dalhousie University)

Abstract

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 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.

Suggested Citation

  • Benjamin Dennis & Talan Iscan, 2000. "The Virtues of Flexibility: Import Dependence and External Shocks," Department of Economics at Dalhousie University working papers archive eshocks, Dalhousie, Department of Economics.
  • Handle: RePEc:dal:wparch:eshocks
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    File URL: http://www.economics.dal.ca/RePEc/dal/wparch/eshocks.pdf
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Benjamin Dennis & Talan Iscan, 2002. "Terms of Trade Risk," Department of Economics at Dalhousie University working papers archive totrisk, Dalhousie, Department of Economics.

    More about this item

    Keywords

    open economy macroeconomics; heterogeneity; terms of trade; resource reallocation;

    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

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