Stefan F. Schubert

Dynamic effects of terms of trade shocks: The impact on debt and growth ☆

The recent empirical literature on the economic effects of terms of trade shocks highlights not only the direct effects on growth, but also the resulting changes in volatility and debt. We link the procyclicality of sovereign debt to terms of trade shocks and provide theoretical underpinnings for standby facilities such as the “Exogenous Shocks Facility” recently created by the IMF. By modeling international capital market imperfections and changes in creditworthiness during adverse terms of trade shocks, we show that transitions can involve excessive adjustment as debt decumulation overshoots its long run equilibrium to prolong the adjustment recession. Our model adds a novel dynamic dimension to the Harberger-Laursen-Metzler effect. In contrast to the previous terms of trade literature, we highlight that the precise nature of the capital imperfection is key to the results. When credit depends not on the level of debt but on the debt to equity ratio the model naturally features dynamic effects that are not found in previous models. It also highlights that how a country responds to terms of trade shocks depends importantly on whether the country is a creditor or debtor. Finally we assess the welfare costs associated with terms of trade shocks. For plausible parameterizations we find that a 20 percent deterioration in the terms of trade may lead to a welfare loss on the order of 10 to 15 percent.

An Analysis of Tourists' Expenditure on Winter Sports Events through the Tobit Censorate Model:

This study analyses the economic impact of the Biathlon World Cup 2009 in Antholz-Anterselva. The survey concentrates on the immediate, direct and short-term additional revenue brought into the region by foreign sports event spectators. The authors first apply an expenditure-based segmentation technique to data collected during the event to separate respondents according to socio-demographic variables. Second, a Tobit analysis is applied to obtain an expenditure model that is useful in explaining the different determinants of trip expenditures by spectators of the event. The results reveal significant socio-demographic differences between the four expenditure groups. For instance, heavy spenders are composed mainly of mature tourists, arriving for the first time in medium-sized groups. Also, the most important factors in total expenditure are income level, the geographical origin of the spectator and the size of the travel group.

The Dynamics of Temporary Policies in a Small Open Economy

The paper corrects a subtle, but crucial, conceptual flaw in a solution procedure initially proposed in 1990 by Sen and Turnovsky to analyze anticipated regime changes in small open economies based on the intertemporal optimization of rational forward-looking agents. The problem is its failure to consider the intertemporal solvency of the economy consistently. The paper focuses on temporary shocks, although the procedure also applies to announced future permanent policy changes. Since the issue is generic and relevant to a large class of policy changes, it is important for the intertemporal solvency aspect to be incorporated consistently. The authors show that the seriousness of the error in the previous solution procedure depends upon the specific shock, and two contrasting examples are discussed. Copyright 2002 by Blackwell Publishing Ltd.

Dynamic effects of subsidizing the tourism sector

This paper studies the short-run and long-run effects of a production subsidy to the tourism sector of a small open economy, which can also be thought of as a region within a country. The authors introduce a two-sector dynamic general equilibrium model in which the tourism sector is considered to be labour-intensive and produces traded services. The other sector is capital-intensive and produces a non-traded good, which is also used for capital accumulation. Labour and capital can move freely between sectors. Economic decisions are made by forward-looking representative agents which optimize their intertemporal welfare by choosing consumption of both the non-traded good and tourism services, the sectoral allocation of labour and the rate of wealth accumulation. The authors discuss the short-run, dynamic and long-run effects of a production subsidy to the tourism sector. In the short run, the introduction of a subsidy to tourism production leads to a boom in that sector. As time passes, the economy-wide capital stock is decumulated and production of tourism falls. In the long run, compared to the situation before the subsidy was implemented, tourism production remains on a higher level, whereas output of the non-traded good drops.

DYNAMIC EFFECTS OF OIL PRICE SHOCKS AND THEIR IMPACT ON THE CURRENT ACCOUNT

We study the dynamic effects of an oil price shock on key economic variables and on the current account of a small open economy. We introduce time-nonseparable preferences into a standard model of a small open economy, where imported oil is used both as an intermediate input in production and as a consumption good. Using a plausible calibration of the model, we show that the changes in output and employment are quite small, and that the current account exhibits the J-curve property, both being in line with recent empirical evidence. After an oil price increase, employment falls and the current account first deteriorates. Over time, with gradually falling expenditures, the trade balance improves sufficiently to turn the current account into a surplus. The model thus provides a plausible explanation of recent empirical findings.

Coping with externalities in tourism: a dynamic optimal taxation approach

The paper studies optimal taxation (subvention) when tourism is associated with „multiple externalities“, using a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services and populated by a large number of intertemporally optimizing agents. Depending on the volume of tourism production, the externality can be either positive or negative. We show that the first best optimum, achieved by a central planner, recognizing the externality, can be replicated in a decentralized economy by using a time-varying tax rate. This ensures that (i) the steady state of the first best optimum is reached and that (ii) the speed of convergence to steady state is socially optimal.

A Dynamic Model of Economic Growth in a Small Tourism Driven Economy

The paper studies the dynamics of economic growth caused by an increase in the growth rate of tourism demand. We develop a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services (island economy model), populated by a large number of intertemporally optimizing agents, deriving utility from consuming an imported good. Tourism services are produced by means of a simple AK technology by using imported capital, its accumulation associated with adjustment costs. Moreover, the economy can lend or borrow at the international financial markets at the given world interest rate. Adjustments in the relative price of tourism services ensure market clearance for tourism services. The long-run growth rate of the economy is tied to the growth rate in tourism demand. An increase in the latter increases thus the economy’s long-run balanced growth rate. In contrast to the standard one-good small open economy endogenous growth model, where the economy is always on its balanced growth path, we show that there are transitional dynamics after an increase in the growth rate of tourism demand. In particular, the short-run growth rate of output rises gradually towards its higher long-run level, and the market price of tourism increases during transition. Thus, an increase in the growth of tourism demand, say, caused by higher economic growth abroad, leads to a boom in the small open economy and increasing terms of trade. Adjustments of the relative price of tourism services (i. e. the real exchange rate) can therefore not protect the economy from demand disturbances.

A general equilibrium analysis of casino taxation in Portugal.

In Portugal, casinos are taxed at a 50% rate and the tax receipts are allocated to Turismo de Portugal, which can use it in different ways – subsidizing tourism firms, advertising and so on. A recent study shows that casino demand in Portugal is originated predominantly in the domestic market. There is a debate about (i) the level of the tax levied on casinos and (ii) how the tax receipts should be used, as tourists rarely visit casinos. The paper contributes to this debate. The authors develop a dynamic general equilibrium model of a small open economy, comprising an industrial sector producing an internationally traded good, a tourism sector producing tourism services offered to both foreign tourists and residents and a casino sector supplying gambling services. Domestic residents derive utility from consuming the traded good, tourism services and gambling. The model is calibrated to the Portuguese economy. Using numerical simulations, the authors discuss the welfare effects of abandoning the taxation of casinos, as well as of different uses of casino tax receipts.

Anticipated Fiscal Policy Changes and Goods Market Adjustments

Abstract Government policies are frequently known to be temporary and thus their termination is perfectly anticipated. These foreseen policy changes must be consistent with equilibrium in both the goods market and asset markets. Potential problems arise because prices often play dual roles, both as final goods prices, and as asset prices, as components of rates of return. We show how the economy accommodates an anticipated policy change depends upon its production flexibility and its structure. With flexible investment, an anticipated reduction in government expenditure is fully accommodated by capital accumulation. When investment involves adjustment costs, the marginal utility of wealth and the price of capital both jump so as to maintain equality among rates of return. Goods market clearance is maintained by a combination of increases in consumption and investment. Extensions of the model to include inventories and to a small open economy are also considered and contrasted.

Optimality of Casino Taxation – The Case of Portugal

In Portugal, casinos are taxed at a 50% rate, and the tax receipts are allocated to “Turismo de Portugal”, which can use it in several ways, including subsidizing tourism firms and advertising. A recent study showed that casino demand in Portugal is predominantly originated in the domestic market. Hence, there is a debate about if casinos should be taxed so heavily.