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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

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0834.

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Date of creation: Jan 1982
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Handle: RePEc:nbr:nberwo:0834

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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.:
  1. 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. [Downloadable!] (restricted)
  2. Nancy Peregrim Marion, 1981. "Anticipated and Unanticipated Oil Price Increases and the Current Account," NBER Working Papers 0759, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. 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(1976-3), pages 537-584. [Downloadable!]
  4. Rudiger Dornbusch, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. 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, . [Downloadable!] (restricted)
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  1. Francisco Rosende & Roberto Toso, 1984. "Una Explicación para la Tasa de Interés Real en Chile en el Período 1975-1983," Cuadernos de Economía (Latin American Journal of Economics), Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 21(62), pages 25-36. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
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  3. Alberto Petrucci, 2004. "Asset Accumulation, Fertility Choice and Nondegenerate Dynamics in a Small Open Economy," Working Papers 2004.121, Fondazione Eni Enrico Mattei. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
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