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Intertemporal Price Speculation and the Optimal Current-Account Deficit

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Maurice Obstfeld

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Abstract

The paper studies the effects of terms-of-trade fluctuations in an infinite-horizon optimizing model of a small open economy. While the current-account response to a transitory terms-of-trade shock is in part explicable by intertemporal smoothing, an important additional factor is the effect of anticipated future terms-of-trade shifts on the real value of the external debt in terms of the home consumption basket. When foreign borrowing is indexed to the import good, a temporary worsening of the terms of trade creates the expectation of a decline in the real value of external debt. This fall in the relevant real interest rate leads households to increase consumption while export prices are low and to decrease consumption sharply once the terms of trade recover. If an adverse price shock is of sufficiently brief duration, instantaneous utility will rise initially.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1100.

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Date of creation: Oct 1983
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Publication status: published as Obstfeld, Maurice. "Intertemporal Price Speculation and the Optimal Current-Account Deficit." Journal of International Money and Finance, Vol. 2, No. 2 (August 1983).
Handle: RePEc:nbr:nberwo:1100

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  1. Olivier, CARDI, 2005. "The Zero-Root Property : Permanent vs Temporary Terms of Trade Shocks," Université catholique de Louvain, Département des Sciences Economiques Working Paper 2005030, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  2. Richard H. Clarida, 1985. "International Lending and Borrowing in a Stochastic Sequence Equilibrium," Cowles Foundation Discussion Papers 771, Cowles Foundation, Yale University. [Downloadable!]
  3. Rudiger Dornbusch, 1986. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," NBER Working Papers 1336, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Olivier, CARDI, 2005. "Another View of the J-Curve," Université catholique de Louvain, Département des Sciences Economiques Working Paper 2005029, Université catholique de Louvain, Département des Sciences Economiques. [Downloadable!]
    Other versions:
  5. Maurice Obstfeld & Alan C. Stockman, 1985. "Exchange-Rate Dynamics," NBER Working Papers 1230, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Michael Mussa, 1985. "The Real Exchange Rate as a Tool of Commercial Policy," NBER Working Papers 1577, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Elbadawi, Ibrahim A. & Soto, Raimundo, 1994. "Capital flows and long-term equilibrium real exchange rates in Chile," Policy Research Working Paper Series 1306, The World Bank. [Downloadable!]
  8. Robert E. Cumby & Frederic S. Mishkin, 1987. "The International Linkage of Real Interest Rates: The European - U.S. Connection," NBER Working Papers 1423, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Partha Sen & Stephen J. Turnovsky, 1989. "Deterioration of the Terms of Trade and Capital Accumulation: A Reexamination of the Laursen-Metzler Effect," NBER Working Papers 2616, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Ibrahim A. Elbadawi & Raimundo Soto, . "Real Exchange Rates and Macroeconomic Adjustment in Sub-Sahara Africa and Other Developing Countries," ILADES-Georgetown University Working Papers inv093, Ilades-Georgetown University, School of Economics and Bussines. [Downloadable!]
    Other versions:
  11. Richard H. Clarida, 1986. "International Lending and Borrowing in a Stochastic Sequence Equilibrium," NBER Working Papers 1944, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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