Working Paper: NBER ID: w4615
Authors: Kala Krishna; Marie Thursby
Abstract: We use an approach developed by Krishna and Young to examine the ability of economies to adjust to exogenous shocks. While, in general, economies cannot be ranked in terms of their flexibility, we provide a partial ordering for certain types of economies. In particular, properties of the revenue function are used to show that placing restrictions on factor mobility and on production in certain sectors reduces the flexibility of a small open economy with respect to all price, endowment, and technology shocks of small enough magnitude. Since one can think of these restrictions as distortions, we would expect them to reduce the level of GNP in the economy. The insight provided by the analysis of flexibility is that, not only is the level of GNP affected, but also the intrinsic ability of the economy to adjust to shocks is reduced.
Keywords: flexibility; exogenous shocks; capital mobility; economic adaptability
JEL Codes: F0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased capital mobility (F20) | greater flexibility (F12) |
| restrictions on production targets (D20) | reduced flexibility (D29) |
| capital mobility enhances flexibility in response to shocks (F20) | greater flexibility (F12) |