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Transitory terms-of-trade shocks and the current account: the case of constant time preference

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  • Maurice Obstfeld

Abstract

The paper uses an intertemporal perfect-foresight optimizing model to analyze the effect of transitory terms-of-trade shocks on a small open . economy's current-account and utility time profiles. An adverse terms-of-trade shift known to be temporary induces the economy to run down its stock of external assets in the period before the terms of trade revert to their initial level. Subsequently, the assets consumed during this period are reaccumulated. The current-account response is due only in part to a desire to smooth out the future consumption stream. In addition, households know that the real value of any debt incurred while the terms of trade are unfavorable will be reduced sharply when the terms of trade improve. This opportunity for intertemporal price speculation causes the time path of instantaneous utility to be discontinuous,

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File URL: http://www.federalreserve.gov/pubs/ifdp/1981/194/ifdp194.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 194.

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Date of creation: 1981
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Handle: RePEc:fip:fedgif:194

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References

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  1. Maurice Obstfeld, 1981. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," NBER Working Papers 0599, National Bureau of Economic Research, Inc.
  2. Rudiger Dornbusch, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
  3. Hamada, Koichi, 1969. "Optimal Capital Accumulation by an Economy Facing an International Capital Market," Journal of Political Economy, University of Chicago Press, vol. 77(4), pages 684-97, Part II, .
  4. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
  5. Nancy Peregrim Marion, 1981. "Anticipated and Unanticipated Oil Price Increases and the Current Account," NBER Working Papers 0759, National Bureau of Economic Research, Inc.
  6. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
  7. Rudiger Dornbusch & Paul Krugman, 1976. "Felxible Exchange Rates in the Short Run," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 537-584.
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Cited by:
  1. 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.
  2. Alberto Petrucci, 2004. "Asset Accumulation, Fertility Choice and Nondegenerate Dynamics in a Small Open Economy," Working Papers 2004.121, Fondazione Eni Enrico Mattei.
  3. Hung-Ju Chen & Chen-Min Hsu, 2006. "Current Account, Capital Formation and Terms of Trade Shocks: a Revisit of the Harberger-Laursen-Metzler Effect," Journal of Economics, Springer, vol. 88(2), pages 179-201, 08.
  4. Francisco Rosende & Roberto Toso, 1984. "Una Explicación para la Tasa de Interés Real en Chile en el Período 1975-1983," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 21(62), pages 25-36.

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