Non-tradable Sector Research Articles

Winners and Losers from Sovereign Debt Inflows

We study the transmission of sovereign debt inflow shocks on domestic firms. We exploit episodes of large sovereign debt inflows in six emerging countries which are due to the announcements of these countries’ inclusion in two major local currency sovereign debt indexes. We show that these episodes significantly reduce government bond yields and appreciate the domestic currency, and have heterogeneous spillovers on domestic firms. Financial and government-related firms experience positive abnormal returns in the days following the announcement episodes. Instead, companies operating in tradable industries exhibit negative abnormal returns after the episodes. We find that the former expansionary effect is more pronounced in countries where the government bond yields drop more in response to the announcement, while the latter recessionary effect is larger in countries where the domestic currency appreciates more. Also, we find that firms which rely more on external financing are positively affected by these events. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in recipient countries. They suggest that these inflows can contribute to reshaping the domestic economy, by increasing the importance of the non-tradable sector at the expenses of the tradable one.

Sectoral minimum wages in South Africa: Disemployment by firm size and trade exposure

ABSTRACTThis paper measures the impact of South African minimum wages on small and large firm employment in a sector that is exposed to international competition (agriculture) and one that is not (retail). Small farm employment is most vulnerable to minimum wage legislation. In contrast, large farm employment was shielded from employment losses. While this shift represents a short-run response to minimum wages, it may intensify the long-run movement towards fewer, larger, and more capital-intensive farms. Retail employment experienced no changes in employment, regardless of firm size. These results are in line with the idea that firms exposed to international markets cannot easily increase prices when their employees’ wages increase while non-tradable sectors can more readily shift the burden of higher labour costs onto consumers by increasing prices. Implementation of a uniform national minimum wage ignores this type of heterogeneity, and could lead to intra-industry changes in concentration and inequality.

Imperfect mobility of labor across sectors and fiscal transmission

Our paper investigates the sectoral effects of government spending shocks and highlights the role of labor mobility. Our VAR evidence for sixteen OECD countries reveals that a shock to government consumption by 1% of GDP increases non-traded value added by 0.7% of GDP and generates a decline in traded value added. The value added share of non-tradables rises by 0.35% of GDP, thus implying that the reallocation of resources accounts for 50% of the sectoral fiscal multiplier. Consistently, our estimates show that the non-traded sector is highly intensive in the government spending shock and experiences a labor inflow. The shift of hours worked toward the non-traded sector is, however, subject to mobility costs which vary across countries. When we explore quantitatively the sectoral effects of a shock to government consumption that is highly intensive in non-traded goods, we find that the model can replicate the magnitude of the rise in the share of non-tradables we document empirically once we allow for both labor mobility and capital installation costs. Financial openness also matters as it further biases the demand shock toward non-tradables. To account for the cross-country dispersion in the responses of sectoral shares we estimate empirically, we have to let the degree of labor mobility vary across countries.

Trade Wars and the Disarray in the Global Trading System: Implications for the Philippines

This study uses the Caliendo and Parro ( 2015 ) multi-sector, multi-country, general equilibrium Ricardian trade model with national and international input-output linkages to assess the impact on welfare of higher tariffs due to the U.S.–China trade war in the case of the Philippines. A sample of 65 countries including a constructed rest of the world is used, with 31 ICIO tradeable and non-tradeable sectors and 2015 as the base year. The constructed scenario is of the U.S.–China tariff tit-for-tat and retaliatory measures taken by Mexico, Canada, EU, Russia, and Turkey against the United States during 2018. The findings show that the Philippines and others in the sidelines could incur larger welfare losses than those directly involved in the conflict, in contrast with the sanguine prediction of other models.

Is There a Relationship between Productivity and Relative Prices in South Africa?

Abstract The Balassa–Samuelson hypothesis proposes that there should be a direct relationship between a country’s real exchange rate and its productivity performance. Given South Africa’s (SA’s) poor relative productivity performance, a weak and depreciating real exchange rate would be expected under this hypothesis. However, the real effective exchange rate has been relatively stable since the early 2000s. We construct tradable and nontradable price and productivity measures and show that tradable sectors have tended to experience more rapid productivity growth than nontradable sectors in both SA and the United States. However, we show that there is not a strong relationship between sectoral productivity and prices in SA, or with the real exchange rate with the United States. Better explanations for SA’s deteriorating international competitiveness (shown by higher relative prices) are a relatively high domestic inflation rate caused by nontradable sectors, as well as disproportionately large increases in government wages over the post–global financial crisis period.

Inflation – Harrod-Balassa-Samuelson Effect in a DSGE Model Setting

This paper sets up a two-country two-sector dynamic stochastic general equilibrium model that introduces sector specific productivity shocks with quality improvement mechanism of goods. It provides a model-based theoretical background for the Harrod-Balassa-Samuelson phenomenon that describes the relationship between productivity and price inflation within different sectors in a particular economy. Both, the calibrated and the estimated model are able to show that the Harrod-Balassa-Samuelson effect is confirmed by inducing tradable sector productivity shocks as they drive the non-tradable sector price inflation higher than the tradable sector price inflation. By doing this, we overcome the problem that the tradable productivity increase in a typical open economy specification reduces the relative price of domestic tradable goods relative to the foreign ones. DOI: 10.15458/ebr.86

DETERMINANTS OF THE CURRENT ACCOUNT BALANCE AND OUTPUT IN UKRAINE

Using quarterly data for the 2000—2017 period, fiscal and monetary policy effects upon the real exchange rate (RER), the current account balance and output (GDP) in Ukraine are estimated with the SVAR model. It is found that the budget surplus is a factor behind both an improvement in the current account and the business cycle, arguing in favor of fiscal discipline as a stabilization tool. On the other side, there is weak evidence that the monetary hangover measured as a deviation of the monetary aggregate M2 from its equilibrium trend contributes to an improvement in the current account as well, but at the cost of significant output losses with 4 to 6 quarter lags. Similar outcomes are brought about by the RER depreciation above trend, with a simultaneous drop in output on impact combined with the current account surplus. Both money supply and RER effects could be explained by crowding out of investments in the nontradable sector by the export activities, as it is implied by the familiar dependent economy model. As there is an increase in the money supply in response to economic boom, it rejects criticisms about artificial money shortages in Ukraine. Our results provide support to the so-called «45o rule» of a direct link between output and the current account, although with a significant time lag. А favourable current account effect upon output is achieved in the long run either, with an opposite restrictionary effect being observed on impact. While there is no causality running from the money supply to the budget balance, a strong link between the budget deficit and expansionary monetary stance is observed.Everything seems to be that an increase in GDP is an effective factor in improving the current account balance over the long term, while a favorable feedback also appears with a significant time lag (in the short term, it is quite the opposite, that is, improving the current account balance worsens the cyclical GDP position). However, the decomposition of the remnants does not allow asserting the importance of causality «catÞyt» та «ytÞcat». It is obvious that changes in the balance of the current account depend largely on the state of external markets, and the cyclical GDP dynamics ─ on internal factors, which relate primarily to the exchange rate and the monetary "sway" (the effect of the budget balance is less significant).

Regional effects of inflation targeting in Russia: Factors of heterogeneity and structural inflation rates

Inflation targeting in Russia implies maintaining stable low inflation at a level of 4% throughout the country. The presence of structural factors in some regions can determine deviations from the all-Russian inflation, which can lead to different effects of monetary policy in Russian regions. In this paper, we analyze regional heterogeneity of inflation and factors of inflation deviations from the national average, estimate structural levels of inflation in the regions of Russian Federation. These estimates confirm the presence of some regional factors of inflation deviations from the all-Russian indicator, such as the difference in productivity growth of the tradable and non-tradable sectors (Balassa—Samuelson effect), effective exchange rates, real incomes and product stocks. In addition, our results confirm the presence of regions with price growth rate above and below monetary policy target. The results of this research can be used for the development of monetary and communication policies.

Tradability of output and the current account in Europe

This paper investigates empirically the relationship between specialisation in the production of tradable output and the current account balance. According to the ‘tradability hypothesis’ that is examined, countries that specialise in highly tradable sectors tend to run current account surpluses while countries with dominant non-tradable sectors risk running current account deficits. In order to test this hypothesis empirically we develop a value-added based tradability index which captures the tradability of a country’s output. Applied to a large sample of European countries, our empirical model provides strong evidence in favour of the tradability hypothesis. The main policy implication is that the anxieties about ‘de-industrialisation’ in large parts of Europe seem justified with a view to growing external imbalances.

Policy shocks, current account and the macroeconomy in a developing country

Purpose This is a theoretical paper in the field of international macroeconomics. The purpose of this paper is to focus on a dynamic interaction between current account imbalance and unemployment in response to some policy-induced shocks for a small open economy under a flexible exchange rate. Design/methodology/approach The paper uses a two-sector framework: one sector is traded and another is the non-traded sector that is subject to an effective demand constraint. The current account imbalance arises due to the discrepancy between production of traded goods, household consumption of traded goods and government purchases of importables. The authors keep the asset structure simple by considering only domestic currency and foreign bonds that are imperfect substitutes. The paper considers a standard methodology of dynamic adjustment process involving change in foreign exchange reserves and exchange rate under perfect foresight. The saddle path properties of the equilibrium are also examined. Findings The results of comparative static exercises depend on a set of structural features of a developing country, which include asset substitutability, wage price rigidity and sectoral asymmetries. The paper shows that expansionary monetary policy, balanced budget fiscal expansion and financial liberalization have an ambiguous effect on the current account balance, foreign exchange reserves, non-traded sector and the level of employment. Originality/value The existence of Keynesian unemployment with fixed prices is the key ingredient of this paper. The paper introduces the problem of effective demand to analyze the dynamics of current account balance and exchange rate, which, in turn, determine the sectoral composition of output and level of employment.

Life after public employment retrenchment: evidence from Italian municipalities

AbstractWe investigate the interaction between public and private employment at the local level. In contrast to previous literature, which has mainly examined public sector expansions, we provide evidence about the impact of downsizing. Using data from Italian municipalities, the IV strategy we adopt here exploits the fact that the contraction in public employment observed between the last two Censuses (2001–2011) was strongly influenced by the decision made by central government, with little reference to local economic conditions. Our results suggest that exogenous reductions in public employment stimulate the growth of private jobs, mostly in tradables. The change in local prices, especially for housing services, represents a relevant channel for the interplay between the tradable and non-tradable sectors.

Financial intermediation, resource allocation, and macroeconomic interdependence

During the first decade of the euro, southern countries experienced a boom-bust cycle in bank lending, non-tradable sector growth, and capital inflows. I develop a quantitative, open economy model of banking that is consistent with the banks’ behavior in credit allocation and foreign borrowing observed in Spanish data. I illustrate how movements in the frictions of cross-border deposits generate an endogenous asymmetric allocation of bank credit toward non-traded sectors, while producing a persistent and climbing current account deficit. A common central bank’s unconventional policies in response to sudden stops are successful at ameliorating the downturn.

Firm productivity, heterogeneity and macroeconomic dynamics: a data-driven investigation

ABSTRACTIn this paper, we offer a unique firm-level view of the empirical regularities underlying the evolution of the Lithuanian economy over the period of 2000–2014. Employing a novel dataset, we investigate key distributional moments of real and financial variables of Lithuanian firms. We focus in particular on the issues related to productivity, firm birth and death and the associated employment creation and destruction across firm sizes, industry classification and trade status (exporting vs. non-exporting). We refrain from any structural modelling attempt in order to map out the key economic processes across industries and selected firm characteristics. Nevertheless, existing theoretical and empirical findings guide our analysis and the selection of the main variables to investigate. We uncover similar regularities as already highlighted in the literature: trade participation and firm productivity are strongly positively linked, the 2008 recession has had a cleansing effect on the non-tradable sector, firm birth (death) is highly pro(counter)-cyclical. The richness of the dataset allows us to produce additional insights: for example, we observe an increasing share of exporting but a constant share of importing firms since 2000.

Gender-based wage inequality and economic liberalism in the presence of endogenous supply of female labour

This paper develops a three-sector general equilibrium model for a small open developing economy with a non-traded sector that uses only unskilled female labour to provide final services to the skilled families. For measuring the gender-based inequality, we concentrate solely on the unskilled labour market knowing fully well that there exists gender wage discrimination in the market for skilled labour as well. The unskilled female labour supply is endogenously determined from the optimizing behavior of a representative unskilled working family. The consequences of FDI flows and credit market reform have been analyzed on the gender-based wage inequality. Besides, we have gone in for examining the policy impacts on skill-based wage inequality assuming away discrimination against female labour in the high-skilled labour market. Finally, the consequences of FDI flows and credit market reform on the welfare of a poor unskilled working family have also been studied.

The decline of the labor income share in Mexico, 1990–2015

• Mexicós labor share fell from 1990 to 2015 because of reductions in formal sectors. • Stagnant productivity in the self-employment sectors held real formal wages back. • With formal wages anchored, formal productivity gains accrued to profits. • Slow economic growth had a crucial role in the decline of the labor share. • A remaining puzzle is why a rising profit share failed to stimulate growth. The paper studies the decline of the labor income share ( LIS ) in Mexico during the period 1990–2015. The decline is mostly explained by reductions within the economy’s major sectors (including manufacturing, tradables, and non-tradables) rather than by a recomposition of value added towards sectors with low labor shares. In contrast to agriculture—where LIS fell due to a shift of labor force from self-employment to wage-employment—in other major areas of the economy the fall in LIS is explained by reductions within the wage-employment sector. Econometric estimations indicate that parallel declines in the wage share and relative productivity of non-tradables and in the US manufacturing labor share all played a large role in the reduction of the manufacturing wage share in Mexico. More generally, the analysis suggests that the lagging productivity of the economy’s informal non-tradable sector—itself a reflection of the country’s low aggregate rate of economic growth—is a crucial factor in the fall of LIS in the formal sectors. The paper concludes by discussing possible explanations for the paradox of the slow rate of economic growth in Mexico despite the rise in the profit share.

Tourism-Led Growth and Risk of the Dutch Disease: Dutch Disease in Turkey

The Dutch disease phenomenon refers to the adverse effects of the supply of natural resources and production in the tradable sectors specifically the manufacturing sector. Corden and Neary (1982) and Corden (1984) developed the core model of the Dutch disease that it explains a large amount of foreign money to inside the country will appreciate real exchange rate and cause both the spending and reallocation of resources between non-tradable and tradable sectors that it will lead the country to de-industrialisation
 
 The Dutch disease is generally related to the export of natural resources; however, it can be caused by any factors that increase the flow of foreign currency into a country. According to Copelend (1991), the tourism sector is one of the most important sectors that can be the cause of the Dutch disease. Holzner (2010) called the effect of the Dutch disease on tourism-dependent countries the “Beach Disease”. 
 
 The aim of this study is to investigate whether the growing tourism sector in Turkey has caused resource movement and a spending effect that have led the Turkish economy to experience the Dutch disease. The Turkish economy is one of the emerging markets that in the past few decades has experienced noticeable growth in the tourism sector, to the extent that, according to the World Travel and Tourism Council (WTTC, 2017), travel and tourism’s contribution to GDP in Turkey was 12.5% in 2016. By using several methods, such as non-linear and linear ARDL bounds tests and structural VAR, this study aims to investigate whether the Turkish economy experienced Beach Disease over the period from 1976 to 2017. Empirical evidence demonstrates that due to the growth of the tourism sector, the Turkish economy is suffering from symptoms of Beach Disease, such as de-industrialisation and resource allocation to non-tradable sectors. The results show that the Turkish economy has suffered from the Dutch disease due to a growing tourism sector, which has led to de-industrialisation and unstable long-term growth.

Productivity growth, fixed exchange rates, and export-led growth

This paper studies how the fixed exchange rate regime (FERR) may promote growth when a country experiences faster rates of productivity growth in its tradable sector than its nontradable sector. In a simple two-sector model with money, we show that the FERR can reduce the Balassa-Samuelson effect if wage adjustment is subject to nominal rigidities. The undervaluation thus created suppresses real wage growth but increases the size of the tradable sector and leads to higher growth rates of the entire economy. Using cross-country panel data, our econometric exercises provide robust evidence that supports the results. Meanwhile, other fundamentals, including the external balance position, export share in the tradable sector, and the stage of development, play roles in determining the effects of FERR. Last, we apply the empirical results to run simulations on China from 1994 to 2007 to highlight the role of FERR in the country's export-led growth.

Growth Risk of Nontraded Industries and Asset Pricing

Output fluctuations in nontraded sectors are a primary country-specific risk factor because nontraded outputs are consumed domestically. While nontraded sector growth risks are mostly non-diversifiable, they can be partially mitigated by international trades in other sectors. The mitigation decreases with the host country's size because a larger economy needs to execute a proportionally larger trade to substitute for losses in its nontraded consumption. In interest rate markets, fluctuations in the growth of industries with higher nontradability feed greater risk to the economy and lower interest rates. In currency markets, these fluctuations generate large currency premia and explain why known funding and investment currencies are associated with economies of both small and large sizes.

The Industrial Revolution in Services

The rise in national industry concentration in the US between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels. In industries with increasing concentration, the expansion into more markets is more pronounced for the top 10\% firms, but is present for the bottom 90\% as well. These trends have not been accompanied by economy-wide concentration. Top U.S. firms are increasingly specialized in sectors with rising industry concentration, but their aggregate employment share has remained roughly stable. We argue that these facts are consistent with the availability of a new set of fixed-cost technologies that enable adopters to produce at lower marginal costs in all markets. We present a simple model of firm size and market entry to describe the menu of new technologies and trace its implications.

Policy inertia, self-defeating expectations and structural reforms: can policy modeling cope?

This paper tackles the relationship between structural reforms, policy inertia and agents’ expectations. By means of a stylized small-open economy encompassing barriers to entry in the non-tradable sector and political constraints’ associated with the risk of political instability in a context of heterogeneous agents (rentiers and non-rentiers), we show that alternative situations may materialize. One can have rational expectations equilibria where structural reforms are undertaken when expected (or not implemented when not expected), but also situations where agents’ expectations cannot be fulfilled. Thus, we maintain that economic models should take the possibility of self-defeating expectations into account for policymakers to exercise informed judgement, in particular about structural reforms. Some recent episodes in the euro area are discussed in the light of our model.