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 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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2629.
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).
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- Edwards, Sebastian, 1989. "Temporary Terms-of-Trade Disturbances, the Real Exchange Rate and the Current Account," Economica, London School of Economics and Political Science, vol. 56(223), pages 343-57, August.
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