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Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account

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  • Sebastian Edwards

Abstract

In this paper a general equilibrium intertemporal model with optimizing consumers and producers is developed to analyze how the temporary term's of trade disturbances affect the path of real exchange rates and the current account. Changes in the internal terms of trade (due to 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2629.

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Date of creation: Jun 1988
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Publication status: published as "Temporary Terms-of-trade Disturbances, the Real Exchange Rate and the Current Account." From Economica, Vol. 56, pp. 343-357, (1989).
Handle: RePEc:nbr:nberwo:2629

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  1. 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.
  2. Neary, J Peter, 1985. "International Factor Mobility, Minimum Wage Rates, and Factor-Price Equalization: A Synthesis," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(3), pages 551-70, August.
  3. 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.
  4. 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.
  5. 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, University of Chicago Press, vol. 91(1), pages 97-125, February.
  6. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
  7. 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, University of Chicago Press, vol. 93(1), pages 43-65, February.
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Cited by:
  1. Narayan, Seema, 2013. "A structural VAR model of the Fiji Islands," Economic Modelling, Elsevier, vol. 31(C), pages 238-244.
  2. Aquino, Juan Carlos & Espino, Freddy, 2013. "Terms of Trade and Current Account Fluctuations: a Vector Autoregression Approach," Working Papers, Banco Central de Reserva del Perú 2013-008, Banco Central de Reserva del Perú.
  3. Michael Dueker, 1995. "Tariffs and asset market structure: some basic comparative dynamics," Working Papers 1995-009, Federal Reserve Bank of St. Louis.
  4. 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.
  5. 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.
  6. Agenor, Pierre-Richard & Aizenman, Joshua, 2000. "Savings and the terms of trade under borrowing constraints," Policy Research Working Paper Series 2381, The World Bank.
  7. Sainan Huang & Cristina Terra, 2014. "Exchange Rate Populism," THEMA Working Papers 2014-12, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  8. Paul Cashin & C. John McDermott, 1998. "Terms of Trade Shocks and the Current Account," IMF Working Papers 98/177, International Monetary Fund.
  9. 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.
  10. 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.
  11. 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.

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