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 Natural increase Net migration

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 EU15 NMS10 EU25

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 Ireland Portugal Greece Spain

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

The downside - inflation Ireland HICP EMU13 HICP Ireland CPI

Sources of population growth in Ireland Natural increase Net migration

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