Balanced-budget consumption taxes and aggregate stability in a small open economy

In a small open economy facing a perfect world capital market, this paper shows that if the government follows a balanced-budget fiscal policy based on endogenous consumption tax rates, then the steady state is saddle-path stable and hence beliefs-driven aggregate instability can be ruled out. This result is in contrast to those obtained in some closed economy models, and it suggests that unrestricted world capital mobility can help stabilize the economy under the balanced-budget fiscal policy based on consumption taxation.

The new Keynesian Phillips curve in a small open economy: empirical evidence from Australia

This study estimates the new Keynesian Phillips curve (NKPC) ofGali and Monacelli for a small open economy using Australian data.Our detailed investigation hinges on estimating the structuralparameters in five different variants of the Gali–Monacelli NKPC,which relates the inflation process to terms of trade and the realexchange rate; the marginal cost and output gap as proxies for realeconomic activity and the hybrid version incorporating bothforward- and backward-looking inflation expectations. The analysisand extensive robustness checks overwhelmingly establish that theGali–Monacelli NKPC cannot explain the dynamics of inflation andis rejected by the Australian data.

Monetarism, open-economy policies and the ideological crisis

Includes bibliography

Financial Liberalization and Inflationary Dynamics in the Context of a Small Open Economy

The paper develops a short-run model of a small open financially repressed economy characterized by unorganized money markets, capital good imports, capital mobility, wage indexation, and flexible exchange rates. The analysis shows that financial liberalization, in the form of an increased rate of interest on deposits and tight monetary policy, unambiguously and unconditionally causes deflation. Moreover, the results do not depend on the degree of capital mobility and structure of wage setting. The paper recommends that a small open developing economy should deregulate interest rates and tighten monetary policy if reducing inflation is a priority. The pre-requisite for such a policy, however, requires the establishment of a flexible exchange rate regime.

Trade, Foreign Investment and Myanmar's Economic Development during the Transition to an Open Economy

Throughout the 1990s and up to 2005, the adoption of an open-door policy substantially increased the volume of Myanmar's external trade. Imports grew more rapidly than exports in the 1990s owing to the release of pent-up consumer demand during the transition to a market economy. Accordingly, trade deficits expanded. Confronted by a shortage of foreign currency, the government after the late 1990s resorted to rigid controls over the private sector's trade activities. Despite this tightening of policy, Myanmar's external sector has improved since 2000 largely because of the emergence of new export commodities, namely garments and natural gas. Foreign direct investments in Myanmar significantly contributed to the exploration and development of new gas fields. As trade volume grew, Myanmar strengthened its trade relations with neighboring countries such as China, Thailand and India. Although the development of external trade and foreign investment inflows exerted a considerable impact on the Myanmar economy, the external sector has not yet begun to function as a vigorous engine for broad-based and sustainable development.

Implications of biofuel support policies in Europe - a quantitative analysis in an open economy

EU biofuels support Biofuels modelling with CAPRI Scenario setting Main results Concluding remarks Biofuels production and use will remain mainly driven by public support Strong links of biofuels to agricultural markets Development of second generation technologies would ease food-fuel links

Filling the gap: open economy considerations for more reliable potential output estimates. Bruegel Working Paper 2015/11, October 2015

This paper argues that the Phillips curve relationship is not sufficient to trace back the output gap, because the effect of excess demand is not symmetric across tradeable and non-tradeable sectors. In the non-tradeable sector, excess demand creates excess employment and inflation via the Phillips curve, while in the tradeable sector much of the excess demand is absorbed by the trade balance. We set up an unobserved-components model including both a Phillips curve and a current account equation to estimate ‘sustainable output’ for 45 countries. Our estimates for many countries differ substantially from the potential output estimates of the European Commission, IMF and OECD. We assemble a comprehensive real-time dataset to estimate our model on data which was available in each year from 2004-15. Our model was able to identify correctly the sign of pre-crisis output gaps using real time data for countries such as the United States, Spain and Ireland, in contrast to the estimates of the three institutions, which estimated negative output gaps real-time, while their current estimates for the pre-crisis period suggest positive gaps. In the past five years the annual output gap estimate revisions of our model, the European Commission, IMF, OECD and the Hodrick-Prescott filter were broadly similar in the range of 0.5-1.0 percent of GDP for advanced countries. Such large revisions are worrisome, because the European fiscal framework can translate the imprecision in output gap estimates into poorly grounded fiscal policymaking in the EU.

Optimum Trajectory of Dynamic Input-Output Balance Model for Open Economy

When export and import is connected with output of basic production, and criterion functional represents a final state of economy, the generalization of classical qualitative results of the main-line theory on a case of dynamic input-output balance optimization model for open economy is given.