Dual labor markets, public debt management, and exchange rate movements

Although the two essays included here focus on the economy of Lebanon, a country unique in the Middle East due to both its political and economic characteristics, the study is instructive even in the context of other developing economies. The first essay attempts to explain growing public debt and the influx of foreign labor in the face of high unemployment while essay two examines the role of exchange rates and their role in stabilization. The models developed are deemed useful for a more comprehensive understanding of the mechanisms that drive the economics of small and open economies thus contributing to improved policy formulation and implementation in the stated areas.;The first essay tells a two-part story by developing models to explain high government debt and investment as well as the huge influx of labor from abroad even when there is significant domestic unemployment. The study is relevant to many developing countries that are characterized by the presence of various power groups in the population. The model attempts to explain the somewhat surprising phenomenon of pervasive unemployment in Lebanon amongst its citizens while foreign workers continue to pour into the country to fill existing jobs. Also, the model employs game theory to functionalize a political explanation for rapidly increasing domestic debt and investment. The coalitional nature of the government is identified as the primary reason for high domestic debt and investment.;A simple error-correction model is estimated in the second essay to study exchange rate based stabilizations in small open economies. Three considerations are taken into account in the development of this model. These are the gap between the actual and equilibrium real exchange rates, inertial inflation, and conventional factors like fiscal and monetary policy. The relative contribution of each of these factors to inflation is then examined. We find that only the initial appreciation following the stabilization program is attributable to inertial inflation. The rest is explained by difference between the actual and equilibrium real exchange rate. Finally, we use our model to show the usefulness of some proposed exchange rate policies.