Macroeconomic Adjustment to Resource Shock in a Growing Two-sector Economy

• Main Author: Kuralbayeva, Karlygash
• Published: University of Oxford 2007
• Subjects: 332
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.485461

This thesis focuses on the issues that face small open economies well endowed with natural resources and subject to external shocks such as changes in their terms of trade or in the world interest rate. Chapter 2 examines the Dutch disease problem in a model with capital accumu: lation and an open international capital account. Given that an improvement in the terms of trade is associated with a decrease in the risk-premium on lending to this economy, as it is shown in the chapter, this can lead to a Dutch party (rather than Dutch disease) in which real exchange rate appreciation is associated with an expansion of the capital-intensive traded sector. The economy also accumulates more debt in the long-run in response to the lower borrowing costs. By adding nominal rigidities to the inter-temporal model of the Dutch dise~e, chapter 3 examines how inflation inertia shapes the dynamic adjustment of the economy to the shocks under different exchange rate regimes. The country's adjustment paths are slow and cyclical if there is significant backward-looking element in the inflation dynamics and the exchange rate is fixed. In contrast, with an independent monetary policy, flexible exchange rate carries out the burden of adjustment and allows escaping severe cycles. The fourth chapter of the thesis evaluates quantitatively whether fiscal policy can moderate the short-run swings owing to 'terms of trade shock in the price of non-traded goods relative to the price of the traded goods. The chapter studies tax reduction and debt retirement policies, which are implemented by means of fiscal feedback rules, given that government is a receipt of oil revenues. The chapter shows that fiscal policy can play its role in offsetting disruptive exchange rate appreciation, which, however, depends on underlying fiscal policy regime.