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International Borrowing, Specialization, and Unemployment in a Small Open Economy
Author(s) -
Osakwe Patrick N.,
Shi Shouyong
Publication year - 2004
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/j.1467-9396.2004.00430.x
Subject(s) - unemployment , economics , small open economy , subsidy , open economy , shock (circulatory) , wage , terms of trade , external sector , full employment , labour economics , production (economics) , international economics , monetary economics , international trade , macroeconomics , monetary policy , market economy , exchange rate , medicine
The authors show that an increase in international borrowing increases specialization and unemployment in a small open economy that is subject to terms‐of‐trade risks. The economy has a production advantage in the export sector. However, the size of the export sector is limited by the available funds. To insure workers against income fluctuations arising from terms‐of‐trade risks, firms in the export sector offer workers a stable wage rate with the possibility of unemployment. An increase in international borrowing increases specialization in the export sector, which leads to higher unemployment when the terms‐of‐trade shock is bad. A state‐contingent price subsidy can reduce unemployment without inefficiently reducing specialization. The results are robust to the introduction of risk‐averse firms.