Temporary Terms-of-Trade Disturbances, the Real Exchange Rate and the Current Account
AbstractIn this paper a general equilibrium intertemporal model with optimizing consumers and producers is developed to analyze how temporary terms-of-trade disturbances affect the path of real exchange rates and the current account. Changes in the internal terms of trade (arising from tariff changes) and to the external terms of trade are considered. The model is completely real, and considers a small open economy that produces and consumes three goods each period. It is shown that, without imposing rigidities or adjustment costs, interesting paths for the equilibrium real exchange rate can be generated. In particular, "equilibrium overshooting" can be observed. Precise conditions under which a temporary import tariff will worsen the current account in period 1 are derived. The way in which temporary and permanent external terms-of-trade shocks will affect the current account are analyzed. Several ways in which the model can be extended are discussed. The results obtained from this model have important implications for the design of balance of payments policy and for the analysis of real exchange rate misalignment and overvaluation. Copyright 1989 by The London School of Economics and Political Science.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by London School of Economics and Political Science in its journal Economica.
Volume (Year): 56 (1989)
Issue (Month): 223 (August)
Contact details of provider:
Postal: Houghton Street, London WC2A 2AE
Phone: +44 (020) 7405 7686
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0013-0427
More information through EDIRC
Other versions of this item:
- Sebastian Edwards, 1988. "Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account," NBER Working Papers 2629, National Bureau of Economic Research, Inc.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sebastian Edwards & Jonathan D. Ostry, 1987.
"Anticipated Protectionist Policies, Real Exchange Rates and the Current Account,"
NBER Working Papers
2214, National Bureau of Economic Research, Inc.
- Sebastian Edwards, 1987. "Anticipated Protectionist Policies, Real Exchange Rates and the Current Account," UCLA Economics Working Papers 437, UCLA Department of Economics.
- Persson, Torsten & Svensson, Lars E O, 1985.
"Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later,"
Journal of Political Economy,
University of Chicago Press, vol. 93(1), pages 43-65, February.
- Torsten Persson & Lars E.O. Svensson, 1983. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," NBER Working Papers 1129, National Bureau of Economic Research, Inc.
- Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
- Maurice Obstfeld, 1981.
"Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?,"
NBER Working Papers
0686, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 251-70, May.
- van Wijnbergen, Sweder, 1985. "Taxation of International Capital Flows, the Intertemporal Terms of Trade and the Real Price of Oil," Oxford Economic Papers, Oxford University Press, vol. 37(3), pages 382-90, September.
- Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
- Neary, J Peter, 1985. "International Factor Mobility, Minimum Wage Rates, and Factor-Price Equalization: A Synthesis," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 551-70, August.
- Aquino, Juan Carlos & Espino, Freddy, 2013. "Terms of Trade and Current Account Fluctuations: a Vector Autoregression Approach," Working Papers 2013-008, Banco Central de Reserva del Perú.
- Chowdhury, Abdur R., 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," BOFIT Discussion Papers 3/2003, Bank of Finland, Institute for Economies in Transition.
- Narayan, Seema, 2013. "A structural VAR model of the Fiji Islands," Economic Modelling, Elsevier, vol. 31(C), pages 238-244.
- Cashin, P. & McDermott, C.J., 1999.
"Terms of Trade Shocks and the Current Account,"
Department of Economics - Working Papers Series
678, The University of Melbourne.
- Kam Leong Szeto, 2002. "A dynamic computable general equilibrium (CGE) model of the New Zealand economy," Treasury Working Paper Series 02/07, New Zealand Treasury.
- Paul Cashin & C. John McDermott, 2003. "Intertemporal Substitution and Terms-of-Trade Shocks," Review of International Economics, Wiley Blackwell, vol. 11(4), pages 604-618, 09.
- Pierre-Richard Agenor & Joshua Aizenman, 2000.
"Savings and the Terms of Trade Under Borrowing Constraints,"
NBER Working Papers
7743, National Bureau of Economic Research, Inc.
- Agenor, Pierre-Richard & Aizenman, Joshua, 2004. "Savings and the terms of trade under borrowing constraints," Journal of International Economics, Elsevier, vol. 63(2), pages 321-340, July.
- Agenor, Pierre-Richard & Aizenman, Joshua, 2000. "Savings and the terms of trade under borrowing constraints," Policy Research Working Paper Series 2381, The World Bank.
- Michael Dueker, 1995. "Tariffs and asset market structure: some basic comparative dynamics," Working Papers 1995-009, Federal Reserve Bank of St. Louis.
- Paul Cashin & Christopher J. Kent, 2003. "The Response of the Current Account to Terms of Trade Shocks," IMF Working Papers 03/143, International Monetary Fund.
- Cermeño, Rodolfo & Grier, Robin & Grier, Kevin, 2010. "Elections, exchange rates and reform in Latin America," Journal of Development Economics, Elsevier, vol. 92(2), pages 166-174, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.