Ms. Yevgeniya Korniyenko, Magali Pinat, and Brian Dew
Anecdotal evidence suggests the existence of specific choke points in the global trade network
revealed especially after natural disasters (e.g. hard drive components and Thailand flooding,
Japanese auto components post-Fukushima, etc.). Using a highly disaggregated international trade
database we assess the spillover effects of supply shocks from the import of specific goods. Our
goal is to identify inherent vulnerabilities arising from the composition of a country’s import basket
and to propose effective mitigation policies. First, using network analysis tools we develop a
methodology for evaluating and ranking the supply fragility of individual traded goods. Next, we
create a country-level measure to determine each country’s supply shock vulnerability based on the
composition of their individual import baskets. This measure evaluates the potential negative
supply shock spillovers from the import of each good.
Bin Grace Li, Mr. Stephen A. O'Connell, Mr. Christopher S Adam, Mr. Andrew Berg, and Mr. Peter J Montiel
VAR methods suggest that the monetary transmission mechanism may be weak and unreliable in
low-income countries (LICs). But are structural VARs identified via short-run restrictions capable
of detecting a transmission mechanism when one exists, under research conditions typical of these
countries? Using small DSGEs as data-generating processes, we assess the impact on VAR-based
inference of short data samples, measurement error, high-frequency supply shocks, and other
features of the LIC environment. The impact of these features on finite-sample bias appears to be
relatively modest when identification is valid—a strong caveat, especially in LICs. However,
many of these features undermine the precision of estimated impulse responses to monetary policy
shocks, and cumulatively they suggest that “insignificant” results can be expected even when the
underlying transmission mechanism is strong.
We review the literature on Dutch disease, and document that shocks that trigger foreign exchange inflows (such as natural resource booms, surges in foreign aid, remittances, or capital inflows) appreciate the real exchange rate, generate factor reallocation, and reduce manufacturing output and net exports. We also observe that real exchange rate misalignment due to overvaluation and higher volatility of the real exchange rate lower growth. Regarding the effect of undervaluation of the exchange rate on economic growth, the evidence is mixed and inconclusive. However, there is no evidence in the literature that Dutch disease reduces overall economic growth. Policy responses should aim at adequately managing the boom and the risks associated with it.
This paper investigates the impact of long-run terms-of-trade shocks. Analytically, we show that, if capital goods are largely importable or the labor supply is sufficiently elastic, then natural-resource booms increase aggregate investment and worsen the current account, but Dutch ‘Disease’ effects are weak. We then examine 18 oil-exporting developing countries during 1965-89. Favorable terms-of-trade shocks increase investment and (especially government) consumption, but reduce medium-term savings; hence, the current account deteriorates. Nontradable output increases, in response to real appreciations, but Dutch Disease effects are strikingly absent. Investment, consumption, and nontradable output respond more to a terms-of-trade decline than to an increase.