The Global business cycle, commodity prices and the small open economy : a monetary approach

Abstract

The analyses contained in this Thesis seek to provide insight into the complex mechanisms through which global monetary disturbances affect the small open economy. The key insight provided by this study is that the adjustment response within the small open economy depends critically on both the characteristics of the economy itself and the transmission linkages affected by the monetary shock. An important contribution lies in the analysis of the case where the small open economy possesses no market power and must face terms of trade determined on world markets. The analysis demonstrates how a non-neutral monetary disturbance in the world economy can lead to relative price changes among traded goods which in turn imply terms of trade adjustments for the small economy. From this emerges additional perspectives on the transmission of global business cycle effects to small economies than have been previously established. Within this framework, a number of other relevant considerations are investigated, such as the role of non-traded goods in the transmission of foreign disturbances, the implications of supply versus demand induced export growth, and the domestic consequences of supply versus monetary induced commodity price increases. Wherever possible, the analytical results are examined against established empirical findings. This provides not only a 'real world' perspective on matters which might otherwise be regarded as purely hypothetical, but adds relevance to consideration of policy responses as well. Show more