Non-tradable Sector Research Articles

Tourism development and urban housing prices: Evidence from China

Tourism as a nontradable sector affects regional price indexes. However, the effect of tourism on urban housing prices has not been sufficiently studied. This study uses panel data for prefecture-level cities in China to empirically examine the effect of tourism development on urban housing prices. The findings indicate that tourism development can increase urban housing prices, and the effect mainly comes from domestic tourism. This conclusion is not only derived from the instrumental variable method considering endogenous problems but also verified by multiple robust methods including quantile regression. Meanwhile, the study innovatively identifies the mediating role of investment effect, income effect, and public service effect in the impact of tourism on urban housing prices. It further shows the heterogeneity of cities, with more significant effect of tourism on urban housing price in small- and medium-sized cities, noncentral cities, central and western cities, and nontourist cities. This study reveals the commonality and particularity of the impact of tourism development on urban housing price. It not only enriches the research on tourism economics from the perspectives of the relationship between tourism and real estate but also further enriches the relevant conclusions and theoretical mechanism of the impact of tourism on housing prices.

Sectoral implications of policy induced household credit expansions

This paper analyses the sectoral implications of household credit expansions in a two-sector open economy model. In the model, policy-induced expansion in banks’ willingness and ability to lend to households results in new lending, boosting aggregate demand and average wages in the nontradable sector. Under fixed relative wages and mark-up pricing in the tradable sector, wage pressures translate into inflationary pressures. The inflation-targeting central bank increases the policy rate to contain inflationary pressures. This intervention causes a real exchange rate appreciation, followed by a reduction in international competitiveness and a contraction of the tradable sector output. This way, the model illustrates that consumer credit expansions can trigger premature deindustrialisation, shifting the sectoral structure away from the high-productivity tradable sector towards the lower-productivity nontradable sector. Key macroeconomic developments from the Turkish economy between 2002 and 2013 are presented to motivate the model.

Monetary policy when export revenues drop

We study how monetary policy should respond to shocks that permanently alter the steady state structure of the economy. In such a case monetary policy affects not only the short run misallocations due to nominal rigidities, but also relative prices which stimulate reallocation of capital. We consider a permanent and negative shock to export revenues that requires a larger traded sector and a smaller non-traded sector in the new steady state. This reallocation calls for a change in relative prices during the transition, but may also lead to a period of high unemployment. We show how an appropriate monetary policy could mitigate the welfare costs of the transition by allowing the exchange rate to depreciate, and thereby allowing inflation to increase in the short run. Traditional monetary policy regimes, such as inflation targeting or a fixed exchange rate, would imply high unemployment and inefficiently slow transition. Stabilizing nominal wage growth, in contrast, would be close to the welfare-optimal monetary policy.

Measuring local employment multipliers and informal employment: a stochastic frontier approach

ABSTRACT This paper offers policymakers a novel tool for calculating employment multipliers. A theoretical model incorporating a non-tradeable employment function is combined with a stochastic frontier methodology to estimate an accurate multiplier. The advantage of this model is that it allows a consideration of unobserved informal employment when estimating the multiplier. We find an employment multiplier effect of 1.2 jobs in the non-tradeable sector for one job in the tradeable sector. Also, the greater the number of skilled consumers, the higher the multiplier indices and the lower the level of informal employment. Moreover, specialised sectors requiring skilled workers also present less informal employment. We use provincial data for Spain over the period 1995–2013.

Political economy of real exchange rate levels

Voluminous theoretical and empirical research shows that real exchange rate (RER) undervaluation could be conducive to economic development. Why do countries then often avoid the pursuit of policies that facilitate undervaluation or even intentionally pursue RER overvaluation? We address this question by investigating economic, institutional, and policy factors that help explain the within-country variation in RER undervaluation in a baseline panel of 68 developing and 39 developed countries between 1989–2013 using OLS and GMM estimators. Our results indicate that increases in the share of non-tradable sector output, imported input intensity of exports, and capital account openness is systematically associated with less undervalued RERs. We also provide evidence that independent central banks and democratic institutions are linked to RER overvaluation. Our key findings are robust to using alternative specifications, measures, estimation techniques, samples, and additional control variables. A preliminary comparison of Latin America and East Asia suggests interesting support for our key findings.

Privatization Policy and Foreign Competition in Vertically Related Markets

This paper examines the privatization policy of an upstream state-owned enterprise (SOE) that competes with a foreign private rival and a downstream SOE, wherein the upstream firm supplies an intermediate input to the downstream firms. Specifically, the study investigates two scenarios where the intermediate input is utilized in either the traded or non-traded sector. In the traded sector, foreign competition exists, while the non-traded sector consists of all domestic firms. The findings of the study indicate that, in the model where the downstream is a traded sector, partial privatization of the upstream SOE is not optimal when the downstream SOE is fully nationalized or privatized. On the other hand, in the model where the downstream is a non-traded sector, partial privatization of the upstream SOE is optimal when the downstream SOE is fully nationalized or fully privatized. Therefore, the study suggests that if the upstream industry supplies its product mainly to the non-traded sector, such as domestic transportation or construction, partial privatization of the upstream SOE is recommended. However, if the intermediate input primarily flows to traded sectors, such as steel or international shipment, partial privatization of the upstream SOE is not advisable.

Macroeconomic impact of the Sino–U.S. trade frictions: Based on a two-country, two-sector DSGE model

To examine the impact of the recent Sino–U.S. trade frictions on the macroeconomics of China and the United States, we constructed a two-country, two-sector dynamic stochastic general equilibrium model. This model was used to explore the tariff transmission mechanism in such trade frictions and provide a basic analytical framework for future research on bilateral trade frictions. Based on our benchmark analysis, the tariff shocks affect non-tradable sectors through the tradable sectors, which, in turn, have impacted consumption, investments, prices, and production. Specifically, the tariffs on intermediate and final goods affect the economy from the supply and demand sides, respectively, and as the trade dependence decreases, the economic volatility caused by the tariff shocks also decreases. Moreover, our simulation showed that the impact of the trade frictions on the macroeconomics of the two countries has been asymmetrical, which is consistent with the objective economic realities.

Tourism and COVID-19: An economy-wide assessment

The promotion of domestic tourism is widely identified as a promising recovery measure to revive tourism economies severely affected by the COVID-19 pandemic. The paper intends to estimate the economy-wide impacts of a hypothetical scenario of domestic tourism promotion in a small, emerging economy with heavy reliance on international tourism. The estimated impacts are compared with the economy-wide negative impacts of the pandemic via domestic and international tourism, to understand the potential level of compensation of domestic tourism promotion. The industry-level analysis indicates Dutch disease effects due to the decline in international tourism. A hypothetical boom in domestic tourism benefits non-tradable sectors to a significant level. Aggregate level analysis indicates a potential for economic gains through domestic tourism promotion, though such gains are inadequate to fully offset the foregone economic benefits due to loss in international tourism.

Examining the interaction of technology adoption-diffusion and sectoral emission intensity in developing and emerging countries

This study offers a new perspective on the drivers of environmental sustainability for sector level (manufacturing, mining, agriculture, business, trade, and transport) analysis. In this case, country-level sectoral dynamic index for technology adoption and emission intensity were constructed to study the environmental efficiency effect of technology adoption and technology diffusion across tradable and non-tradable sectors by using empirical illustration for 49 developing and emerging countries during 1990–2018 period. By correcting for potential bias arising from endogeneity and cross-border spillover effects via cross-section dependence, results reveal long-term effects of technological changes. Importantly, it is shown that the environmental efficiency effect of technology adoption holds in technology-intensive sectors (i.e manufacturing, mining, agriculture) only at lower capitalization levels, thus establishing a U-shaped nexus of technology adoption and carbon emission. Additionally, it is found that trade networks reduce emission intensities by improving technology diffusion across all the tradable sectors and in transport sector. Moreover, trade alone mitigates carbon intensity across all the sectors while income per capita spur carbon intensity in the tradable sectors. From policy insight, the study identifies the need for stricter policy directives to scale up energy and clean technologies adoption in all sector activities.

Exchange rate policy and heterogeneity in small open economies

This paper studies the role of exchange rate regimes in shaping the distributional effects of external monetary shocks. I model a small open economy where agents differ in wealth and in exposure to international trade, producing either tradable or non-tradable goods. The central bank responds to a foreign interest rate hike by a monetary tightening to stabilize the exchange rate or lets the currency depreciate, keeping the interest rate low. I find that exchange rate flexibility distributes consumption gains to the poorer agents. The monetary tightening required to stabilize the currency disproportionately affects their disposable income through interest payments on loans and falling wages. Attempts to fix the exchange rate increase consumption inequality. Flexibility also benefits the non-tradable sector because conditions in this sector are more sensitive to domestic demand and sharply deteriorate when domestic interest rates rise.

A structural decomposition analysis of “Latin American decade” for selected countries

The 2003-2014 period for Latin America refers to the recent boom period within the growth cycles of the region and is called as “Latin American decade”. Given that, the purpose of the paper is to analyze this specific period based on structural transformation dynamics. In this context, structural decomposition methods are evaluated to outline structural transformation patterns. For this analysis, the Groningen Growth and Development Centre (GGDC) Economic Transformation Database (ETD), which provides annual data on employment and real value added by 12 sub-sectors, is used for 8 LA countries (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru). The decomposition analysis is applied for three main periods (1990-2018, 1990-2003 and 2003-2014) within the growth cycles of the region. So it is predicted to define whether the “Latin American decade” differs from the previous period, regarding structural dynamics. During the “Latin American decade”, the region has gone commodity-led growth pattern and deindustrialization. Moreover, this pattern is not so homogenous. Specifically, the mining sector and non-tradeable sectors dominate the structural dynamics of some countries. Due to these patterns, the results underlie that productivity gains remained at low levels. Latin American countries need to design growth strategies that focus on escaping from productivity traps.

Does the Digital Economy Promote Domestic Non-Tradable Sectors?: Evidence from China

The impact of the digital economy (DE) has become the important faction of the market volume of domestic non-tradable sectors (DNSs). As rising digitalization supersedes traditional market power as a driving force, there is increasing concern about the volume of trade and economy; however, the literature of how the DE procession changed the DNS’s are limited, although the Chinese government is eager to enlarge the scale of the domestic market to be consistent with the trend of digitalization. This paper addressed this issue by employing a series of data from prefecture-level cities between 2010 and 2019 in China. Using panel data methods under fixed effect, synthetic difference-in-differences (SDID), and temporal-spatial econometrics, the paper’s hypothesis sheds light on the positive impact of the DE on DNSs. The regression results showed a 14.84% of improvement for the effects of DE development on DNS growth. The policy impact effect increased the average treatment effect by 3.9% average treatment effect, accompanied by temporal and spatial correlations. Further analysis illustrated that a possible intermediary mechanism through which the DE promotes the development of DNSs is the enhancement of the local product market development. It was concluded that policy-makers of developing countries should be devoted to breaking down domestic trade barriers among different regions to enhance the benefits of digitalization.

Productivity and real exchange rates for India: does Balassa-Samuelson effect explain?

PurposeThis study aims to explore the long-run equilibrium relationship between India’s real exchange rate and sectoral productivity trends using internationally comparable KLEMS databases on productivity for India, China, Euro area, the USA, the UK and Japan.Design/methodology/approachThis study uses pooled mean group estimations for panel data suggested by Pesaran et al. (1999). This method is chosen because of the presence of variables with different orders of integration.FindingsThe results find support for an “extended” Balassa–Samuelson (BS) hypothesis which allows labour market frictions that does not allow for wage equalisation between traded and non-traded sectors within a country. This mechanism continues to find some support when we separate out distribution sector that comprises wholesale and retail trade in the domestic services sector. The empirical evidence suggests that India’s real exchange rate is anchored to domestic fundamentals and is closely aligned to its fair value over a medium to long-time horizon.Originality/valueTo the best of the authors’ knowledge, unlike the available literature, which uses aggregate per-capita income as proxy for a country’s productivity growth, this paper perhaps makes the first attempt to validate the BS hypothesis by accounting for productivity differential at the sectoral levels using KLEMS data across countries. Moreover, this study takes the country’s productivity improvement rather than using a basket of countries, a prevalent practice in the literature. While this paper uses India’s data, which witnessed a prolonged appreciation in its real effective exchange rate and rapid technological progress, the authors believe its findings and policy implications could be applicable to the similar emerging market economies.

Exchange rate risk, banks' currency mismatches, and credit supply

We exploit the post-Brexit depreciation of the British pound as an exogenous shock to show how exchange rate shocks transmit to the German real economy through the banking sector. German banks with GBP currency mismatches (between assets and liabilities, including off-balance sheet items) suffer losses when the currency of assets depreciates relative to that of liabilities, which they internalize by cutting back credit supply. For a one percentage-point loss in equity, a bank cuts credit supply by 73 basis points on average, with stronger effects for banks with lower equity capital. The credit contraction of German banks (i) affects also firms that are not directly related to UK conditions, (ii) holds across all industries, including non-tradable sectors, (iii) impacts relatively more small borrowers, and (iv) decreases affected firms' investments.

Why Does Agricultural Growth Dominate Poverty Reduction in Low- and Middle-income Countries?

“Alternative models have to compete on the basis of their ability to give a satisfying account of some facts. Facts ask for explanations, and explanations ask for new facts”. Robert M. Solow, Daedalus (Fall 2005) This paper provides an explanation of the relation between agricultural growth and poverty reduction for open economies with full employment. The analysis also shows that the poverty-reducing impact of agricultural growth in an open economy is far greater if there is unemployed labour or if the supply of labour is highly elastic—conditions often thought to prevail even in open economies. The model draws attention to the critical role of the rural non-tradable sector in poverty reduction. While ample data are available to show that sector to have a large share of employment, even relative to agriculture itself, data for other variables for the sector such as the share of GDP, labour intensity, price, and income elasticities of demand are not available. Thus, an important contribution of the paper is to establish the need for such data if the processes of poverty reduction are to be understood. JEL classification: Q01, I30 Keywords: Agricultural Growth, Poverty, Developing Countries, Open Economy

The Balassa-Samuelson model with job separations

We incorporate sectoral job separation rates in a small open economy model to examine the Balassa-Samuelson (B-S) effect. Unequal separation rates give rise to compensating wage differentials. We simulate the model for Japan and replicate a feature of its economy that the nontradeables sector has higher wages and a higher separation rate compared to the tradeables sector. With productivity growth in the tradeables sector, labour moves from the tradeables sector to the nontradeables sector if tradeables and nontradeables are complements in consumption. The B-S effect is dampened. With a higher separation rate in the nontradeables sector, higher wages in the nontradeables sector amplifies this labour movement. Nevertheless, unemployment always falls due to a positive income effect. In contrast, the effect of productivity growth in the nontradeables sector is to lower the real exchange rate and raise unemployment.

Sectoral credit reallocation: An excessive bank risk-taking explanation

This paper develops a theoretical model to provide an alternative explanation for the credit to nontradable sector growing faster than credit to tradable sector, after a US expansionary monetary policy, based on an excessive risk-taking channel. This is, a reduced foreign interest rate decreases bank default probability, which in turn diminishes banks’ incentives to take excessive risk. This produces a reallocation of loan supply to nontradable sector since tradable loans are riskier. Using monthly sectoral credit data at the bank level for the Peruvian economy in the 2004–2019 period, we find evidence of the excessive bank risk-taking channel on sectoral credit reallocation.

Government employment and local multipliers in Greek municipalities

This paper studies the impact of the remarkable increase in the share of public employment on the private sector across 156 Greek municipalities using Census data (1981–2011). To capture causal effects, we implement an instrumental variables approach, based on a shift-share design. We find that an additional job in the public sector creates nearly 0.7 jobs in the non-tradable sector (construction and services), whilst no significant effects are detected for the tradable sector (manufacturing). The findings appear to be robust to different estimation strategies, spillovers from contiguous regions, and to the inclusion of confounding factors. Importantly, we document that the most recent decline in the number of public servants did not significantly affect the private sector.

CO2 The Structural Conditions for the Expansion of COVID-19 in Peru

Peru is one of the most affected and infected countries by COVID-19. The expansion of the virus could not be contained by lockdowns and states of emergency. The re-opening of the economy increased the expansion of COVID-19. We argue that the role of Peru in the international division of labor is not only the structural condition for the persistence of labor precariousness in the country, but also the principal cause for the expansion of COVID-19 in Peru. Labor precariousness and the expansion of COVID-19 are the expressions of the country’s economic and business structure. An economic structure heavily dependent on the non-tradable sectors and a business structure dominated by micro business undertakings, characterized by low productivity levels, do not permit the eradication of precarious labor conditions as economic growth hinges on economic progress abroad and precariousness is the source of profit of micro companies. The persistence of labor precariousness impedes the containment of COVID-19. Labor precariousness expressed in wages at the subsistence level and the lack of labor stability in the formal sector, in combination with the structural character of informality have been the catalysts for the expansion of the virus. We demonstrate that COVID-19 is not a democratic virus but a class virus. For Metropolitan Lima, districts with a more than average rate of informality have also a more than average rate of COVID-19 infections. The neoliberal development model has been responsible for the incapacity of the government to implement measures in accordance with the country’s social and economic structure that might have contained the expansion of COVID-19. This model is the expression of Peru’s function in the globalized world, the relation between this role and the country’s economic and business structure, the functionality of the extractive development model for the Peruvian State, and the correlation of class forces within and outside the state apparatuses. Keywords: Peru, COVID-19, labor precariousness, international division of labor, neoliberal development model

Does the Volatility of Oil Price Affect the Structure of Employment? The Role of Exchange Rate Regime and Energy Import Dependency

The volatility of oil price as a key energy resource for modern economies has a significant impact on the macroeconomic situation. In addition to affecting aggregated production, consumption, employment and inflation, oil shocks can affect the economy in a more nuanced way. One consequence of the turmoil in the oil market may be a shift in the employment structure between the tradable and non-tradable sectors, which we investigate in this paper. The aim of this study is to test how oil price volatility affects the structure of employment in Central and Eastern European countries. Our main hypothesis is that oil price volatility causes a temporal employment reallocation between tradable and non-tradable sectors. To verify this assumption, we created Interacted Panel VAR (IPVAR), which showed that the shocks of oil price volatility affect the employment structure and this impact is conditioned by the level of dependence on energy imports and the exchange rate regime. The constructed impulse response functions showed that, in general, oil price volatility causes a temporal fall in relative employment in the manufacturing (tradable) sector. For periods of an above-average import of energy, the exchange rate regime does not matter for the response of the structure of employment. Inversely, when countries are less dependent on imports of energy, the exchange rate regime matters for shock absorption—for floats, oil price shocks cause a temporal fall in relative employment in manufacturing, whereas for pegs, there is a slight relative increase in employment in manufacturing.