Policy In Open Economies Research Articles

Parameter instabilities and monetary policy in a small open economy: Evidence from an estimated model for the UK

This paper reconsiders whether monetary policy in small open economies responds to exchange rates by studying possible parameter instabilities in a Dynamic Stochastic General Equilibrium model. The main focus of the paper is to revisit preceding evidence on the response to exchange rate movements by the Bank of England and determine if its reaction function has remained constant throughout the sample. To this end, I estimate a small open economy general equilibrium model using Bayesian econometric techniques over rolling windows. I find overwhelming evidence of shifts in several parameters, including those related to the policy rule. Furthermore, posterior odds tests reveal a time-varying response to exchange-rate fluctuations by the monetary authorities. The results favor the model with the nominal exchange rate embedded in the policy rule for the initial subsamples. However, the evidence steadily evolves across windows and ultimately changes to prefer the model specification with no exchange rate. The paper also documents evident variations in the model dynamics derived from the instability of parameters via rolling-window impulse response functions and variance decomposition analysis.

Optimal fiscal policy in small open economies with habit persistence

Abstract This paper sets up a small open economy model with habit persistence in consumption in which distortionary taxation is available in a flexible price environment. In open economy, the habit persistence in consumption aggravates the terms of trade externality, absent in closed economy, calling for more aggressive fiscal policy. While optimal labor income taxes are time-invariant in a closed economy with internal habit, they should be time-varying in an open economy to alleviate the terms of trade externality, even if the intertemporal elasticity of substitution equals the intratemporal elasticity of substitution. In a small open economy composed of households with habit persistence in consumption, households’ decision to gradually adjust their consumption and labor hours intensifies the undesirable terms of trade externality or the terms of trade channel. This generates a time-varying wedge between the efficiency conditions of the Ramsey planner and the market equilibrium conditions, calling for a time-varying taxation which takes into account the intertemporal elasticity of substitution and the intratemporal elasticity of substitution between home and foreign goods, in addition to the degree of habit and goods market distortion. The volatility of optimal tax rate increases with the degree of habit, whether households have external or internal habit. The volatility of tax rate shows an inverted U-shape in the degree of openness in the small open economy with habit. Finally, the optimal labor income tax rate moves countercyclically for low degree of intratemporal elasticity of substitution, while it moves procyclically for high degree of intratemporal elasticity of substitution.

Financial crises, bailouts and monetary policy in open economies

I jointly study the optimal bailout policy and monetary policy in open economies that borrow in foreign currency from international lenders. A policy dilemma emerges during financial crises. Policymakers trade off the benefit of more bailouts alleviating firms’ financial constraints against the cost of larger currency devaluation, which tightens firms’ financial constraints. I embed the optimal bailout in an otherwise standard “sudden stop” model with nominal rigidities. The model sheds light on the role of bailouts and currency mismatch in driving the exchange rate dynamics, firms’ balance sheets and economic recovery. Quantitatively, the model matches key business cycle moments. A welfare evaluation shows that there are in general welfare gains from the systemic bailout policy despite ex ante moral hazard problems of firms.

Influence Path Analysis of Coordination between Material and Spiritual Civilization Based on the VAR Model

This paper quantitatively analyzes the degree of coordination between China's material civilization and spiritual civilization by establishing an entropy method-coupled coordination degree model. Based on the quantitative results, indicators of China's 1987-2021 tax policy, monetary policy, and open economy policy are introduced to construct a vector autoregressive model to deeply analyze the dynamic relationship between the level of coordination and these influencing factors from multiple perspectives. It is found that maintaining a robust monetary policy, optimizing the structure of foreign trade and exports, and optimizing the structure of taxation are conducive to further enhancing the level of the degree of harmonization between China's material and spiritual civilization, and promoting the high-quality development of China's modernization.

ARE FOREIGN DIRECT INVESTMENTS STILL IMPORTANT FOR GROWTH? A NEW APPROACH FOR TÜRKİYE

So far, especially underdeveloped and developing countries have tried to attract foreign direct investments by adopting open economy policies. In this study, we investigated whether direct foreign investments have a significant impact on the gross domestic product of countries. For this purpose, we examined the long-term relationships between GDP and foreign direct investment between 1986 and 2020 in Türkiye, which is considered a developing country, with a new approach, structural breaks. The results of the research show that there is a two-way positive relationship between the variables. Accordingly, while GDP affects foreign direct investments in the long run, foreign direct investments also affect GDP. The findings obtained from the CCR, FMOLS and DOLS methods used to estimate the coefficients in the long term are generally consistent with each other. It is understood from this study that the policy of adopting open economy policies and attracting direct investments continues to be valid in Turkiye.

The Turkish Economy in the Period between 1990 and 2000 in the Light of the Open Economy Policies of the 1980s Developments

The Turkish Economy in the Period between 1990 and 2000 in the Light of the Open Economy Policies of the 1980s Developments

Teacher-Student Interaction, Non-Academic Staff Support, And Their Impact On Student Retention: The Mediating Role Of Institutional Factors In Foreign Degree-Awarding Institutions In Sri Lanka

Since Sri Lanka introduced open economy policies in 1977, industries and higher education have faced heightened competition. Despite fierce competition for state university admissions, only a few students are accepted even if they meet the qualifications. The rise of foreign degree-awarding institutions in Sri Lanka has led thousands of students to enroll there. However, there has been a noticeable increase in students abandoning their courses recently. Efforts by these institutions to address student retention have been insufficient due to an incomplete understanding of dropout causes. This study investigates the impact of teacher-student interaction and non-academic staff support on student retention, with institutional factors as mediators. The research, involving 360 out of 6,074 undergraduate students from Sri Lankan foreign degree-awarding institutions, used Structural Equation Modeling (SEM) to analyze the data. The findings reveal that teacher-student interaction and non-academic staff support positively influence institutional factors, affecting student retention. However, while teacher-student interaction significantly impacts student retention, non-academic staff support does not have a direct effect. Institutional factors mediate the relationship between both teacher-student interaction and non-academic staff support with student retention. The results provide valuable insights for improving student retention through targeted management actions.

Monetary policy framework in Sri Lanka and its impact on the financial sector: A review

Monetary policy is a prominent stabilization mechanism often used to accomplish price and economic stability in a country. The success of monetary policy depends on the operating economic environment, the institutional framework adopted, and the choice and mix of the instruments used. The aim of this paper was to review the evolution of the monetary policy framework in Sri Lanka and its impact on the financial sector. The review is important, and monetary policy is intended to impact aggregate spending in the economy to contribute to the goals of full employment, price stability, sustainable economic growth, and balance of payments equilibrium. The paper reviewed more than twenty-five research and review papers using a thematic approach. The paper explains the historical evolution of monetary policy regimes in Sri Lanka and the reasons for adopting various monetary and exchange rate policy regimes from time to time. The review considers national and international studies on monetary policy regimes and their impact on the financial system. The paper concludes that the Currency Board could not influence the money supply in any way, and until the adoption of open economy policies in 1977 under the fixed exchange rate regimes, the Central Bank had no control over domestic inflation. The review also identifies that flexible inflation targeting is the international best practice of Central Banking, and flexible inflation targeting enables the maintenance of low inflation, thereby helping economies achieve a high and stable growth path. However, it emphasizes that it should be maintained sustainably subject to several conditions through government intervention.

Limits to Fiscal and Monetary Policy in Small Open Economies

ABSTRACT In this paper we investigate the impact of the balance-of-payments constraint on output, income distribution and policy space in a small economy open to both commercial and financial flows. We do so by extending a Sraffian supermultiplier growth model to consider current and capital accounts and endogenous money. Expansionary fiscal policies increase output and its long run growth rate but have a negative impact on the balance-of-payments. Based on these results, we derive the value of government spending that maximises output while maintaining external equilibrium. Monetary policy also influences the balance-of-payments by attracting foreign financial flows through higher interest rates. This relationship is non-monotonic, since these flows can finance the external deficit resulting from a high output level but can also lead to a greater interest burden. This trade off allows us to find the level of the interest rate that maximises external space. It also implies that, with limits, raising interest rates might allow for higher real wages. Lastly, we examine the effects of the currency denomination of debt. We find that, in case of a depreciation, debt in domestic currency allows for a less contractionary adjustment than foreign currency-denominated debt but does not lead to higher economic growth.

Kebijakan Pajak Dan Keuangan Publik Di Negara-Negara Muslim Selama Pandemi Covid-19: Perbandingan Uni Emirat Arab Dan Qatar

The Coronavirus (Covid-19) pandemic, which was caused by the SARS-CoV-2 virus since the beginning of 2020, has spread throughout the world. Due to the spread of this virus, the world is experiencing a health emergency, considering the large number of deaths caused by infected victims. The World Health Organization, WHO declared Covid-19 a pandemic on March 11, 2020. All affected countries immediately adopted policies to contain the spread of the virus, including the United Arab Emirates and Qatar, which are countries with the most open economic policies in the world. Various policies, especially policies in the field of taxation and public finance were taken by the Governments of the United Arab Emirates and Qatar to overcome the impact of the pandemic. The whole world that has a tax regime is engaged in a virus mitigation strategy.The research, which uses a combination of field research and library research, is analytically descriptive in nature, namely describing and analyzing the responses of the governments of the United Arab Emirates and Qatar regarding tax policy and the use of tax proceeds during the Covid-19 pandemic.The results of the research show that to deal with the consequences of the Covid-19 pandemic which has an impact on almost all sectors of life, the governments of the United Arab Emirates and Qatar have both taken strategic steps, including in tax policy. They issue various regulations related to taxation in terms of collecting tax funds and using tax funds through the state budget.

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.

Commodity price shocks, labour market dynamics and monetary policy in small open economies

We analyse the transmission mechanism of commodity price shocks in inflation targeting emerging economies. Using a panel vector autoregression, we find that for a commodity exporter, the shock causes a real exchange rate appreciation, increases in output, inflation, the nominal interest rate and the trade balance, and a fall in the unemployment rate. The mechanism underlying the dynamics driving the VAR can be understood using a dynamic stochastic general equilibrium model. Search and matching frictions in the labour market and the conduct of monetary policy are key for the model to match the data.

The Ummatic Elements in Malaysia-Turkey Economic Cooperation: A Study on Investment Aspects

The investment aspect is one of the most important aspects in strengthening the economy of a country. As countries that practice an open economic policy, Malaysia and Turkey emphasize the investment aspect of whether Foreign direct investment (FDI) and Direct Investment Abroad (DIA). Malaysia and Turkey are also major players in the Organization of Islamic Cooperation (OIC) and the Economic Cooperation Organization of Eight Developing Countries (D-8). It turns out that these two Islamic organizations have succeeded in becoming catalysts in improving the economy of both countries. These two organizations also clearly make the ummatic agenda the main agenda of the establishment as well as fighting for the welfare of Muslims. This is proven that the amount of investment for these two countries is increasing over time. The diversity of investment sectors is also seen to be increasing based on the needs of Malaysia and Turkey. This study uses a qualitative method that leads to the study of the discipline of history by emphasizing the analysis of primary sources, secondary sources and interviews to produce an authoritative study.

The Ummatic Elements in Malaysia-Turkey Economic Cooperation: A Study on Investment Aspects

The investment aspect is one of the most important aspects in strengthening the economy of a country. As countries that practice an open economic policy, Malaysia and Turkey emphasize the investment aspect of whether Foreign direct investment (FDI) and Direct Investment Abroad (DIA). Malaysia and Turkey are also major players in the Organization of Islamic Cooperation (OIC) and the Economic Cooperation Organization of Eight Developing Countries (D-8). It turns out that these two Islamic organizations have succeeded in becoming catalysts in improving the economy of both countries. These two organizations also clearly make the ummatic agenda the main agenda of the establishment as well as fighting for the welfare of Muslims. This is proven that the amount of investment for these two countries is increasing over time. The diversity of investment sectors is also seen to be increasing based on the needs of Malaysia and Turkey. This study uses a qualitative method that leads to the study of the discipline of history by emphasizing the analysis of primary sources, secondary sources and interviews to produce an authoritative study.

Currency misalignments, international trade in intermediate inputs, and inflation targeting

In the literature on optimal monetary policy in open economies, the presence of local- currency pricing provides a rationale for targeting CPI inflation rather than PPI inflation. In this paper, we reexamine this conclusion by incorporating international trade in intermediate inputs into Engel (2011). We find that the cooperative monetary policymaker should target the final-goods output gaps, the PPI inflation rates at both stages of production, the currency misalignments at both stages of production, and the vertical relative price gaps. Welfare analysis shows that the monetary policymaker should target the weighted average intermediate-goods PPI (WPPI) inflation rather than CPI inflation for most combinations of price stickiness at both stages of production.

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.

Monetary Policy and Redistribution in Open Economies

This paper develops an open-economy heterogeneous-agent New Keynesian model in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics from a distributional perspective. Our analysis yields two main takeaways. First, heterogeneity in households’ international integration plays a central role in driving the unequal consumption responses to external shocks, more so than income and wealth. Second, the conduct of monetary policy in open economies faces a stabilization-inequality trade-off, with fixed exchange rate regimes leading to amplified but more equal consumption responses to external shocks.

Evaluation of Policy Implementation to Support Innovation in Industrial Sector: A Case Study of the Textile Industry in Inner Mongolia, China

In the contemporary context, innovation stands as the primary propulsive agent in steering the course of social and economic advancement within any given nation. In accordance with prevailing global trends, nations have attained noteworthy accomplishments through the formulation and execution of innovation policies designed to enhance the progress of their domestic and sector-specific landscapes. The efficacy of any policy hinges upon its formulation with a forward-looking vision, steadfast implementation, and rigorous evaluation of outcomes. Innovation policy, as a pivotal instrument, assumes a guiding role in the advancement of a nation, region, and industry, informed by scientific and technological achievements, knowledge reservoirs, and innovative endeavors. Commencing in the latter part of the 1970s, China embarked upon a trajectory characterized by the implementation of an open economic policy. Within this overarching framework, notable emphasis has been placed on the widespread assimilation of scientific and technological progress, with particular emphasis on the industrial domain. This commitment to fostering technological prowess culminated in the formal adoption of the "Innovation-Oriented Economic Development Strategy" in the year 2006. This milestone document represents the government's inaugural articulation of its primary policy directive pertaining to innovation-driven economic development. The focus of this study centers on the examination of relatively large factories engaged in the production of wool and cashmere products within the textile industry of Inner Mongolia, China. The research encompasses an investigation into the developmental experiences related to innovation within this sector. Furthermore, it includes an analysis of the innovation policy endorsed by the government for this industry, along with an evaluation of its practical implementation.

Prudential policies and systemic risk: The role of interconnections

The impact of prudential policies in open economies depends on their intrinsic efficacy and the spillovers from the close financial partners. Using a sample of advanced economies, we find that prudential policy interventions significantly reduce systemic risk in the financial systems with the impact amplified through a network of financial investment links. Using the Spatial Autoregressive (SAR) model we show that the indirect (network) effect enforces the direct effect and accounts for up to 87% of total risk reduction assuming the uniform policy interventions. We are the first to perform a spillover analysis for prudential policies and uncover the importance of financial network and uniform interventions for the reduction of systemic risk.

Commodity prices, bank balance sheets and macroprudential policies in small open economies

How important are liability dollarization in the transmission of commodity shocks on business cycles? To address this question, we developed a small open economy DSGE model with a banking sector and financial friction. The banks collect funds in the international capital markets in the form of foreign debt, which is denominated in dollars. Faced with a commodity shock, the results suggest that the presence of liability dollarization generates a greater response output, compared to the model that ignores this financial mechanism. In fact, after simulating a series of shocks in each period, bank balance sheets amplify expansions and deepen economic recessions. Thus, the volatility of business cycles is strongly affected by the presence of liability dollarization. However, the application of countercyclical macroprudential policies, based on Basel III capital requirements, absorbs the impacts of commodity shocks. In addition, this type of policy allows greater gains in social welfare. In summary, it can be pointed out that the bank balance sheets are quantitatively important because they provide information to understand macroeconomic fluctuations.