How have small open economies responded to the

How have small open economies responded to the challenge of globalization? Mark A. Wynne Federal Reserve Bank of Dallas Prepared for "The Challenges of Globalization for Small Open Economies with Independent Currencies“ Reykjavik, Iceland, May 31 - June 1, 2007

Small open economies • Which countries are small & open? • Smallness => price taker in global markets • Applebaum & Kohli (1979) – Canada-US relationship • Relevant price data difficult to obtain • Reliance on quantity measures

Openness to trade Correlation: -0. 35

Openness to capital Correlation: -0. 16

Openness to labor Correlation: -0. 17

United Kingdom population growth Net migration Natural increase

Globalization and fiscal policy • Tytell & Wei: no effect of openness to capital on budget deficits – No a priori reason to expect other dimensions of openness to matter • Other dimensions of fiscal policy – Tax competition

Adjusted top statutory tax rate on corporate income in the EU EU 15 NMS 10 EU 25

A case study: Ireland • Classic example of small open economy – Small: • 0. 2 percent of global GDP – Open: • Imports + Exports = 147% of GDP • Open labor market • Foreign assets + liabilities > 1500% of GDP • Poster child for benefits of globalization: – Per capita GDP: • 1960: $4, 987 (35% of US) • 2005: $29, 990 (80% of US)

The Celtic Tiger GDP per capita US Euro area Portugal Ireland Spain Greece

A case study: Ireland (II) • Monetary policy framework: – Currency board 1922 -1979 – Managed float 1979 -1999 – Monetary union 1999 -date • Fiscal policy – Corporate tax regime

The downside - inflation Ireland HICP Ireland CPI EMU 13 HICP

Sources of population growth in Ireland Net migration Natural increase

Independent floating currencies Total Number of countries with floating regime in 1990 that were still floating as of date shown

Concluding observations • Openness (to trade, capital, labor) seems to be associated with better inflation outcomes • Less evidence of an effect on fiscal policy – Tax competition does seem to be affecting corporate tax policy across the EU