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Catching‐up and Regulation in a Two‐Sector Small Open Economy
Author(s) -
Klundert Theo van de,
Smulders Sjak
Publication year - 1999
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00174
Subject(s) - economics , deregulation , productivity , small open economy , convergence (economics) , welfare , capital (architecture) , monetary economics , open economy , hysteresis , international economics , market economy , macroeconomics , monetary policy , exchange rate , history , physics , archaeology , quantum mechanics
Deregulation is often aimed at reducing mark‐up pricing in technologically stagnant sheltered sectors. The paper shows that this may decrease the process of catching‐up and welfare since it shifts resources away from R&D‐intensive tradables sectors. Catching‐up and deregulation are analyzed in an R&D‐based growth model that allows for international capital mobility, trade, and spillovers. Knowledge spillovers raise the productivity of R&D in the exposed sector which results in catching‐up. In the long run, the economy grows at the exogenous world growth rate. Capital mobility speeds up convergence. Temporary shocks have long‐lasting effects as the economy exhibits hysteresis.