Open Economy Context Research Articles

Global Industrial Chain Resilience Research: Theory and Measurement

Global industrial chain resilience refers to the capability of industrial chains, on a global scale, to maintain or restore their normal operations and value-creating ability in the face of various risks and uncertainties. This resilience is crucial for addressing crises, promoting economic growth, and upholding national security. However, there is currently a lack of unified standards and methods for measuring and enhancing global industrial chain resilience. This study constructs a global industrial chain production model in a multi-country and multi-stage open economy context. It utilizes data from the 1990–2021 Eora MRIO (Multi-Regional Input–Output) dataset to analyze the formation, measurement, and influencing factors of global industrial chain resilience. The research findings indicate that since 2010, the disparity in industrial chain resilience between different countries has gradually widened. Manufacturing plays a pivotal role in maintaining industrial chain stability. Additionally, factors such as input costs and technological levels have been found to positively impact the enhancement of global industrial chain resilience. Therefore, this study provides theoretical and empirical support for exploring and improving global industrial chain resilience, offering valuable guidance for policymakers and entrepreneurs.

Exploring the role of the belt and road initiative in promoting sustainable and inclusive development

AbstractSustainable and inclusive development aims to achieve long‐term economic growth while ensuring environmental and social sustainability. This study investigates the significance of the Belt and Road Initiative (B&R) in promoting sustainable and inclusive development in Chinese provinces along its route, considering it a quasi‐natural experiment. To assess the effects, we construct an index system that captures critical dimensions of sustainable and inclusive development. The results reveal that the B&R has positively influenced sustainable and inclusive development in the Chinese provinces along the route. This impact is facilitated through transmission mechanisms such as technological innovation and upgrading industrial structures. However, variations exist between provinces along the Silk Road Economic Belt and those along the Maritime Silk Road, with the former experiencing more pronounced effects. These findings provide a valuable foundation for the government to leverage the B&R and develop comprehensive sustainable, and inclusive development strategies. Furthermore, this study offers insights into promoting high‐quality development in an open economy context.

Between lives and economy: COVID-19 containment policy in open economies

This paper studies containment policies for combating a pandemic in an open-economy context. It does so via quantitative analyses using a model that incorporates a standard epidemiological compartmental model in a general equilibrium multi-country, multi-sector Ricardian model of international trade with input–output linkages. We quantitatively evaluate the long-run welfare and real-income losses due to the short-run pandemic shocks, and we study the role of trade in these effects. We devise a novel approach to computing national optimal policies. We find that (1) the long-run welfare and real-income losses due to just two years of pandemic shocks are substantial; (2) international trade helps buffer both the welfare and real-income losses, and it also saves lives; (3) the computed optimal policies indicate that most countries should have tightened their containment measures relative to what was done; and (4) compared to the case of autarky, the optimal policy under trade is generally more stringent.

INVESTIGATING THE MODERATING ROLE OF GENDER, EXPERIENCE AND EDUCATION ON ENTREPRENEURIAL ORIENTATION AMONG CROATIAN ENTREPRENEURS

Entrepreneurial orientation (EO) represents one of the most robust scientific constructs explored by academics in management and entrepreneurship literature, where research mostly focuses on exploring EO as a firm-level or as an individual-level construct. Even though numerous studies found gender differences in EO, there is still a need to further explore differences in gender, experience and education on each of the EO dimensions separately. Therefore, the aim of this study is to further test these effects in a small open economy context such as Croatia. More specifically, by using the linear regression analysis this study will explore direct and moderating effects gender, experience and education have on EO and EO’s dimensions within the context of Croatian SMEs. Results of this study have confirmed that male entrepreneurs are more entrepreneurially oriented and are more proactive than their female counterparts. On the other hand, results indicated no significant gender differences in the level of innovation and risk taking. Furthermore, results demonstrated that gender has a significant and direct effect on EO, and on risk taking as a dimension of EO, however, there are no significant effects of gender on innovativeness and proactiveness. Results also confirmed moderation effects gender has on the relationships between the level of education and EO, innovativeness and proactiveness, where these relationships are moderated as such that the relationships are stronger for women than for men. These findings are very interesting since they place significance on the importance education has on the success of female entrepreneurs. Therefore, findings of this study provide more evidence on how important tailor-made educational programs are for the development of successful female entrepreneurs.

MMT and policy assignment in an open economy context: Simplicity is useful, oversimplification not so much

AbstractModern Monetary Theory (MMT) has recently received significant attention in academic and policy circles. Critics question the sustainability of MMT‐prescribed approaches to fiscal and monetary policy, especially over extended periods of time, in the presence of international financial markets, and for developing country governments that borrow in foreign currency. I formalize some of these arguments using a dynamic, open economy, Tobin‐Markowitz portfolio balance environment that takes into account: (1) the role of expectations in the foreign exchange market and the feedback mechanisms between these and the exchange rate and inflation, and (2) interactions between the current account, debt accumulation, and the goods market. I show that continuous monetary accommodation of fiscal policy by a consolidated authority that operates along MMT‐prescribed lines is likely to generate instability and make it hard to maintain full employment with stable inflation. Importantly, this is true even in the absence of rational forward‐looking expectations or sovereign foreign indebtedness.

U.S. Macroeconomic Policy Evaluation in an Open Economy Context Using Wavelet Decomposed Optimal Control Methods

It is widely recognized that the policy objectives of fiscal and monetary policymakers usually have different time horizons, and this feature may not be captured by traditional econometric techniques. In this paper, we first decompose U.S macroeconomic data using a time-frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short-term targets: an inflation target, a money growth target, an interest rate target, and a real exchange rate target. The results determine the reaction in fiscal and monetary policy that is required to achieve an inflation target in a low inflation environment, and when both fiscal and monetary policy are concerned with meeting certain economic growth objectives. The combination of wavelet decomposition in an optimal control framework can also provide a new approach to macroeconomic forecasting.

Evaluating South African Fiscal and Monetary Policy Trade‐offs Using a Wavelet‐Based Model

AbstractThe balance between South African fiscal and monetary policy in an open economy context poses some interesting questions for policymakers: questions such as whether more aggressive monetary or fiscal policy will likely deliver better growth prospects in the short and medium run, and what will the consequences be for the real exchange rate and for inflation? This research applies wavelet analysis to post‐apartheid South African quarterly macroeconomic data, and uses the decomposition to simulate a large state‐space linear‐quadratic tracking model. We find that restricted fiscal policy is the best option to realise growth, leading to lower interest rates, lower inflation, real exchange depreciation and improved trade balances compared to restricted monetary policy.

Modelling a Small Open Economy Using a Wavelet-Based Control Model

This paper develops a wavelet-based control system model that can be used to simulate fiscal and monetary strategies in an open economy context in the time-frequency domain. As the emphasis on real exchange rate stability is increased, the model simulates the effects on both the aggregate and decomposed trade balance under both constant and depreciating real exchange rate targets, and also the effects on the real GDP expenditure components. This paper adds to recent research in this area by incorporating an external sector via the use of a real effective exchange rate as a driver of output. The research is also the first to analyze exchange rate effects within a time-frequency model with integrated fiscal and monetary policies in an open-economy applied wavelet-based optimal control setting. To demonstrate the usefulness of this model, we use post-apartheid South African macro data under a political targeting design for the frequency range weights, where we simulate jointly optimal fiscal and monetary policy under varying preferences for real exchange rate stability.

Structural Change and Wage Inequality in the Manufacturing Sector: Long Run Evidence from East Asia

This paper analyses the long run determinants of wage inequality in the manufacturing sector for a group of East Asian countries that have experienced rapid structural transformations in recent decades. In line with the skill biased technological change hypothesis, our results show that within manufacturing structural change which fosters the participation of higher skilled workers is a strong determinant of the wage premium. However, the paper also highlights an unusual feature of the East Asian model, showing how well-designed education policies, prudent macroeconomic management and selective policies towards foreign capital can help to buffer the pressure of structural change on wage inequality, even in an open economy context.

International Trade and the Urbanization of Developing Countries: Evidence from Asia

A grain surplus and the grain trade are closely related to the urbanization of developing countries. However, existing literature has not given adequate attention to this issue. Our paper develops a theoretical model to explain the mechanisms whereby changes in the grain surplus constrain the level of urbanization in a closed economy context and the grain trade affects the level of urbanization by acting on the grain surplus in an open economy context. A test of the theoretical model applied to some developing countries in Asia during the period 1993-2010 shows that international trade is generally negatively correlated with level of urbanization. However, cereal and non-cereal trade vary in terms of their relation to urbanization: whereas the former is positively correlated with level of urbanization, the latter is negatively correlated with it. Since the net import of cereals relaxes the constraint imposed on the level of urbanization by the domestic grain surplus, it can have a marked positive effect on the course of urbanization. Our research findings show that provided grain production or grain security is guaranteed, developing countries may adopt a policy of importing an appropriate amount of grain to increase their level of urbanization.

垂直的市場構造下における環境政策の政治経済学的分析

This paper analyses the political economy of environmental policies in the presence of an eco-industry pressure group. Previous studies deal with two kinds of lobbiests: capitalists and environmentalists. We introduce into the process a third pressure group representing the eco-industry sector. An incumbent government maximizes its chances of being reelected with an objective function that includes both social welfare and political contributions. Introduction of the eco-industry lobby introduces new political contributions and modifies the incentives of the traditional lobbiests. We suppose an open economy context. In two countries, two polluting sectors are subject to an environmental policy. Therefore, an eco-industry sector that supplies polluting firm abatement goods and services arises. Abatement goods and services are assumed internationally traded, creating the only industrial interaction between the two countries. Pollution affects consumers in both countries and can be transboundary or purely local. Both cases are analyzed. Our main findings can be summarized as follows. Eco-industries will lobby in favor of more stringent environmental policies unless the impacts of foreign competition more than compensate for the increase in turnover that a tighter environmental policy induces. Polluting firms always lobby against tighter environmental policies.JEL Classification: F12, H23, Q58

Is inflation targeting operative in an open economy setting?

The justification for inflation targeting rests on three core propositions. The first is called ‘lean against the wind,’ which refers to fact that the monetary authority contracts (expands) aggregate demand below capacity when the actual rate of inflation is above (below) target. The second is ‘ the divine coincidence,’ which means that stabilizing the rate of inflation around its target is tantamount to stabilizing output around its full employment level. The third proposition is that of stability. This means that the inflation target is part of an equilibrium configuration which generates convergence following any small disturbance to its initial conditions. These propositions are derived from a closed economy setting which is not representative of the countries that have actually adopted inflation targeting frameworks. Currently there are 27 countries, 9 of which are classified as industrialized and 18 as developing countries that have explicitly implemented a fully fledged inflation targeting regime (FFIT). These countries are open economies and are concerned by the evolution of the external sector and the exchange rate as proven by their interventions in the foreign exchange markets. We show that these three core propositions and the practice of inflation targeting are inoperative in an open economy context.

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Sequential Cross-Border Mergers in Models of Oligopoly

Anti-competitive mergers may be held up when outside firms respond pro-competitively. I examine the profitability of cross-border mergers by embedding a class of oligopoly models - where mergers are anti-competitive and actions are strategic substitutes - in a sequential merger game, cast in a two-country setting. I find that cross-border mergers: (i) are held up only when ‘international differences’ are minimal; (ii) happen in clusters, not in isolation; and (iii) can be interdependent. I illustrate with two standard oligopolies. The ‘bumpiness’ of the world suggests that the hold-up problem is less pervasive in an open-economy context.

Estimating open economy Phillips curves for the euro area with directly measured expectations

This paper examines euro-area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods. Instead of imposing rational expectations a priori, Consensus Economics survey data and OECD inflation forecasts are used to proxy inflation expectations. The results suggest that, compared with a closed economy New Keynesian Phillips curve, euro-area inflation dynamics are captured better by the open economy specification. Moreover, in the open economy context, even if we allow for persistence in expectations, the hybrid specification of the New Keynesian Phillips curve is needed in order to properly capture the euro-area inflation process.

The Origins of the Great North Korean Famine: Its Dynamics and Normative Implications

IntroductionWith the collapse of the Soviet Union, North Korea faced what many of the excommunist states faced in the early 1990s: a depletion of aid and a collapse of economic relationships that was truly devastating to its political economy. But unlike states reliant on Soviet aid, North Korea experienced a massive famine that, running primarily between 1995 and 1998, claimed anywhere from 220,000 to 3.5 million people.1 North Korean officials offer the conservative estimate of 220,000 famine-related deaths, while studies of North Korean defectors and outside observers offer the figure of 3.5 million deaths. Both are eye-opening figures, given the relatively little scholarly and media scrutiny the issue has generated.Put the North Korean famine in perspective with past human tragedies: the Great Leap Forward in the People's Republic of China's collectivization effort claimed anywhere from 14 million to 40 million deaths2; India's Great Bengal famine in the 1940s claimed anywhere between 1.5 million and 3 million,3 while the Irish famine claimed around 1 million people.4 Even if one accepts the most conservative estimates, we are still looking at a famine that claimed more than 1 percent of the population.While it is easy to attribute this disaster to a generic incentive problem that often plagues communist states, the North Korean disaster is perplexing if one observes Cuba, the other communist country with striking similarities-an authoritarian regime led by a charismatic leader with profound reliance on the Soviet Union. Cuba's economy did indeed suffer in the early 1990s but, by all indexes, fared much better than that of North Korea. In fact, Cuba is now consistently ranked as one of the High Human countries in the Human Development Index, and is currently ranked 38th on the World Health Organization's world's health system, ahead of South Korea and New Zealand.What's more interesting is that Cuba, unlike North Korea, was not a selfsufficient country at the time of the Soviet collapse. In 1989, the Soviet Union accounted for 85 percent of Cuba's trade, and foreign trade itself accounted for around half of the national income-Cuba imported two thirds of its food, nearly all of its oil, and 88 percent of its machinery and spare parts from the Council of Mutual Economic Assistance (CMEA).5 After the Soviet collapse and the tightening of the U.S. embargo, Cuba lost 85 percent of its trade, and its fossil fuel-based agricultural inputs were reduced by more than 50 percent.6 North Korea, on the hand, under its juche (i.e., self-reliance) ideology, achieved a very successful economic development in the periods of the 1970s and the 1980s, producing agricultural selfsufficiency under its highly industrial and energy-intensive cultivation techniques.This paper attempts to resolve the paradox. I first present two influential thoughts from the famine literature: one that attributes famine to decline in the food supply, and the that holds distribution as the culprit. The theories are put to test by examining the political governance structure of North Korea. This observation allows us to understand North Korea's famine as a by-product of the incentives structures governing the authoritarian regime, especially in light of the fact that decline of the food supply by itself cannot be a sufficient reason for mass starvation in an open economy context. Throughout the paper, I attempt to demonstrate that the two theories do not offer mutually exclusive causal variables, but rather offer different observations of an interrelated chain of effects that drove the country into a full-blown famine. Normative implications are observed from both an economic and ethical standpoint.Literature ReviewScholars generally attribute famine to the Malthusian notion of supply imbalance. Suk Lee's work, The DPRK Famine of 1994-2000: Existence and Impact, emphasizes this food availability decline (FAD) side of the story, attributing the famine to both the collapse in Soviet trade and the series of ecological disasters that hit North Korea in the 1990s. …

Biofuel Subsidies: An Open-Economy Analysis

We present a general equilibrium analysis of biofuel subsidies in an open-economy context. In the small-country case, when a Pigouvian tax on conventional fuels such as crude is in place, the optimal biofuel subsidy is zero. When the tax on crude is not available as a policy option, however, a second-best biofuel subsidy (or tax) is optimal. In the large-country case, the optimal tax on crude departs from its standard Pigouvian level and a biofuel subsidy is optimal. A biofuel subsidy spurs global demand for food and confers a terms-of-trade benefit to the food-exporting nation. This might encourage the food-exporting nation to use a subsidy even if it raises global crude use. The food importer has no such incentive for subsidization. Terms-of-trade effects wash out between trading nations; hence, any policy intervention by the two trading nations that raises crude use must be jointly suboptimal.

Money growth rules as stabilization policies in open economies

High degrees of relative risk aversion induces indeterminacy in cash-in-advance economies. In a small open economy context, this paper finds that endogenous money growth rules can pre-empt such sunspot equilibria in an open economy context. The most promising candidates are policies that actively target past inflation movements or aggregate demand as well as the expected price level.

INTERNATIONAL CREDIT CHANNEL OF MONETARY POLICY: AN EMPIRICAL NOTE

A longstanding macroeconomic issue is how monetary policy affects the real economy. There are economists placing an emphasis on the role of bank lending in monetary transmission. Their view, called the credit view, is that a monetary tightening shifts the supply schedule of bank loans left, thereby forcing bank-dependent borrowers to cut back on expenditures. In the literature, the credit view is typically studied in a closed-economy context. In reality, however, banks make international loans through their overseas branches and subsidiaries. This suggests that the credit view should be studied in an open-economy context. This paper proposes the international credit view: a monetary-policy shock originated in one country propagates to another through banks’ reallocation of funds between the two countries. For testing the hypothesis, Australia and New Zealand provide an excellent case to study. This is because Australian-owned banks dominate the banking market in New Zealand. This paper aims to test the international credit view within a framework of vector auto-regression models. A significant and robust finding is that the supply schedule of loans shifts left in New Zealand after a monetary tightening in Australia.

Estimating Open Economy Phillips Curves for the Euro Area with Directly Measured Expectations

This paper examines euro area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods. Instead of imposing rational expectations a priori, Consensus Economics survey data and OECD inflation forecasts are used to proxy inflation expectations. The results suggest that, compared with a closed economy New Keynesian Phillips curve, euro area inflation dynamics are better captured by the open economy specification. Moreover, in the open economy context, and even if we allow for persistence in expectations, the hybrid specification of the New Keynesian Phillips curve is needed in order to capture the euro area inflation process properly. We also provide some evidence that in recent years of low and stable inflation, euro area inflation dynamics have become more forward-looking and the link between inflation and domestic demand has weakened (ie the euro area Phillips curve has flattened). On the other hand, in low-inflation euro area countries the inflation process seems to have been more forward-looking already since the early 1980s.