Simple fiscal policy rules for small open economies

This paper analyzes the scope for rules-based countercyclical fiscal policy in small open economies where a subset of households is liquidity-constrained. Relative to balanced budget rules, structural surplus rules significantly improve welfare. But they minimize fiscal instrument volatility rather than business cycle volatility. More aggressively countercyclical tax revenue gap rules (strong automatic stabilizers) increase welfare gains by around 50%, with only modest increases in fiscal instrument volatility. If liquidity-constrained households' labor income is independent of raw materials prices, the government should save excess raw materials revenue on their behalf. The best fiscal instruments are transfers, consumption and labor taxes.     

Examining determinants of export performance in small open economies

Maintaining the standard of living in small open economies requires engaging in international exchange. We report the results of a study that was conducted in Austria and refer to certain of the dramatic changes taking place in Europe. The objective is to examine decision-makers’ experiences in managing companies in a small open economy on several factors impacting export performance. Analyzing the effects of multiple determinants on different export performance measures, our findings reveal that in addition to firm size, the most promising predictors of export performance are management’s motives to internationalize and the use of a differentiation strategy. These findings are important because the latter two dimensions are management decision variables. The results of the study are relevant for managers operating in small open economies whose companies must consider both domestic and international developments.     

Relationship between tourism and economic growth

The main goal of this paper is to determine whether tourism activity stimulates economic growth. The study indicates the main variables affecting tourism activity and shows a feedback effect between income and tourism. Findings indicate that tourism not only supplies necessary funds to finance firms' activities, but also stimulates the local firms' productivity and creates new job opportunities that increase the country's welfare. Variables that have important effects on tourism activity, such as entrepreneurship and prices have also been considered.     

News and sovereign default risk in small open economies

This paper builds a unified model of sovereign debt, default risk, and news shocks. News shocks improve the quantitative performance of the sovereign default model in a number of empirically-relevant dimensions. First, with news shocks, not all defaults occur during downturns. Second, the news shocks help account for key differences between developing and more developed economies: as the precision of news improves, the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt in line with more developed economies. Third, the model captures the hump-shaped relationship between default rates and the precision of news obtained from the data. Finally, the news shocks have a nonmonotonic effect on welfare.     

Entrepreneurial marketing strategies during the growth of international new ventures originating in small and open economies

This research provides new knowledge on the development of marketing strategies in international new ventures (INVs) by applying the concept of entrepreneurial marketing to these early internationalizing firms. Using a qualitative approach, the authors identify the key dimensions of this concept in INVs, namely innovativeness and adaptation, and elaborate on both the defining elements and the development of these dimensions. They suggest that the innovativeness and adaptation of marketing strategies decrease during the global growth of INVs. Other contextual issues also underlie the development of international entrepreneurial marketing strategies; in particular, they appear to reflect the turbulence and global diversity of the environment and the market orientation of the INV. The marketing performance of INVs is determined by the fit between international entrepreneurial marketing strategies and the internal and external contingencies of the firm. Propositions for future research and managerial implications are provided.     

Welfare-optimal trade and competition policies in small open oligopolistic economies

Standard trade theory claims that free trade is welfare-enhancing. We show that this is not the case if at least one sector of the economy is a Cournot oligopoly. In a simple small open economy with one oligopolistic and one competitive sector, welfare is an inverted U-shaped function of tariffs. Hence, an optimal tariff rate can be determined. The optimal rate depends on the number of firms in the oligopolistic sector. Below the optimal level, the competitive sector overproduces, i.e. oligopolistic good have a higher marginal effect on welfare. Increasing tariff rates stimulate the production of the oligopolistic sector by dampening imports. Under balanced trade, this reduces exports and production in the competitive sector, thus shifting resources to oligopolistic goods production. We also find that given certain levels of protection, perfect competition is not welfare maximal and, hence, not desirable. The finding explains why developing economies with imperfect competition are often reluctant to embrace trade liberalization and why, conversely, countries with high levels of external protection may be unenthusiastic about competition theory.     

Robust rules for industrial policy open economies

The theory of strategic trade policy yields ambiguous recommendations for assistance to exporting firms in oligopolistic industries. However, some writers have suggested that investment subsidies are a more robust recommendation than export subsidies. We show that, although ambiguous in principle, the case for investment subsidies is reasonably robust in practice. Except when functional forms exhibit arbitrary nonlinearities, it holds under both Cournot and Bertrand competition, with either costreducing or market-expanding investment, and with or without spillovers. Only if firms have strong asymmetries in their investment behaviour and engage in Bertrand competition is an investment tax clearly justified.     

Robustness,information–processing constraints,and the current account in small open economies

In this paper we examine the effects of two types of “induced uncertainty”, model uncertainty due to robustness (RB) and state uncertainty due to finite information–processing capacity (called rational inattention or RI), on consumption and the current account. We show that the combination of RB and RI improves the model's predictions for (i) the contemporaneous correlation between the current account and income and (ii) the volatility and persistence of the current account in small open emerging and developed economies. In addition, we show that the two informational frictions improve the model's ability to match the impulse response of consumption to income and the relative volatility of consumption to income growth.     

Economic growth and crime against small and medium sized enterprises in developing economies

Several studies have explored the relationship between economy-level crime rates or individual-level crime and economic growth. However, few studies have examined the relationship between economic growth and crime against firms. Using data for about 12,000 firms in 27 developing countries this study finds that economic growth is negatively associated with crime. This relationship is stronger for small and medium firms than large firms. The study also explores several economy-wide factors and their influence on the growth–crime relationship for small and medium enterprises. The results are robust to various sensitivity checks.     

Institutions and moral hazard in open economies

I investigate the interaction between international trade and national institutional development in an environment characterized by heterogeneous individuals choosing their education levels to maximize their utilities; and institutions alleviating moral hazard by allowing managers to better observe and verify the productive efforts of workers. Liberalized trade allows institutions to serve as independent sources of comparative advantage. In this setting, I examine the effect of trade liberalization on the distribution of income in institutionally developed and underdeveloped nations. Trade affects income via a direct effect on prices and an indirect effect on the incentives to invest in education.     

Optimal borrowing constraints and growth in a small open economy

Chinese high growth has been accompanied by government restrictions on international borrowing (capital controls). In this paper, we ask: are such restrictions a useful policy tool to facilitate growth? We provide a theory of borrowing constraints on households as a tool to correct a learning-by-doing externality. Borrowing constraints operate as a policy tool through two channels: (i) increasing labor supply and (ii) reallocating labor towards traded goods. We find that welfare gains are closest to that of the First-Best Planner allocation when the externality is not too large. We compute the sequence of optimal constraints along the growth path and show how the use of this policy tool contributes to repressed wages, current account balance, and slow real exchange rate appreciation.     

Optimal borrowing constraints and growth in a small open economy

Chinese high growth has been accompanied by government restrictions on international borrowing (capital controls). In this paper, we ask: are such restrictions a useful policy tool to facilitate growth? We provide a theory of borrowing constraints on households as a tool to correct a learning-by-doing externality. Borrowing constraints operate as a policy tool through two channels: (i) increasing labor supply and (ii) reallocating labor towards traded goods. We find that welfare gains are closest to that of the First-Best Planner allocation when the externality is not too large. We compute the sequence of optimal constraints along the growth path and show how the use of this policy tool contributes to repressed wages, current account balance, and slow real exchange rate appreciation.     

Habit formation and fiscal transmission in open economies

In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. Revisiting the evidence, we find that i) government spending raises output, while inducing a simultaneous decline of investment and the current account and ii) the responses of output and investment are more muted in more open economies while current account deficits tend to be larger. Turning to the model, we explore the role of habit formation for fiscal policy transmission. Specifically, we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously.     

Market imperfections and the instability of open economies

In the presence of small market imperfections, the transitional dynamics of an open economy can become indeterminate, in that there exist an infinite number of equilibrium paths converging to a unique steady state. In contrast to closed economy models, in the open economy, such indeterminacy can arise independently of the curvature of the utility function in consumption. The results suggest that with market imperfections, open economies can be subject to fluctuations caused by randomness unrelated to the economy's fundamentals.     

Habit formation and fiscal transmission in open economies

In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. Revisiting the evidence, we find that i) government spending raises output, while inducing a simultaneous decline of investment and the current account and ii) the responses of output and investment are more muted in more open economies while current account deficits tend to be larger. Turning to the model, we explore the role of habit formation for fiscal policy transmission. Specifically, we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously.     

Green lobbies and transboundary pollution in large open economies

We employ a common agency model of policy making to examine how green lobbies affect the determination of trade and environmental policies in two large countries that are linked by trade flows and transboundary pollution. We show that the impact of green lobbying on environmental policy outcomes depends crucially on the prevailing trade regime—cooperative or non-cooperative—on whether environmental agencies act in a unilateral or coordinated manner, and on the size of the emission leakages and transboundary spillovers. Under free trade, a unilateral increase in pollution taxes reduces domestic emissions at the cost of increased foreign emissions; in this case, if the emission leakages and the associated transboundary spillovers are large enough, green lobbying can create a bias towards lower pollution taxes.     

Mineral economies— Indebtedness without growth

Developing countries with considerable mineral reserves might be expected to have fewer problems with debt-servicing than other developing countries lacking these resources. In fact, during the past decade a not insignificant number of the former had to apply for a rescheduling of their foreign debts. What are the reasons behind this unexpected development?     

Monetary control in open economies: National versus global monetarism

For about a decade the central banks of the leading Western industrial nations have set annual money supply targets.¹ Despite the common monetarist tone of their strategies, each central bank uses its own definition of the money supply relating solely to its national territory (national monetarism), thereby laying itself open to criticism from those who, like Professor Ronald McKinnon, hold that nationally oriented money supply control has had its day and instead advocate management of the world money supply (global monetarism).² The following article tests the arguments of the proponents of an international quantity theory and examines whether domestically oriented money supply management is really out of tune with the times.