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Economic booms, trade deficits and economic policy

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  • Francisco Alcalá
  • Diego Peñarrubia

Abstract

Many economic booms have been accompanied by real exchange rate appreciations, large trade defcits -which have sometimes persisted after the return to the initial exchange rate parity- and a deteriorating traded sector. Those circumstances have typically raised the question of the de-sirability of some stabilization policy. We show that the dynamics induced by an expected productivity shock in an economy where the capital stock is non-mobile across sectors, match those circumstances. Furthermore, we obtain that credit market imperfections tend to exacerbate trade deficits, and to cause an inefficient capacity reduction in the traded sector. Some stabilization policies are explored.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 397.

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Date of creation: Jul 2000
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Handle: RePEc:upf:upfgen:397

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Web page: http://www.econ.upf.edu/

Related research

Keywords: New open economy macroeconomics; non-traded-goods; financial accelerator; trade deficit persistence;

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  8. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  9. de Cordoba, Gonzalo Fernandez & Kehoe, Timothy J., 2000. "Capital flows and real exchange rate fluctuations following Spain's entry into the European Community," Journal of International Economics, Elsevier, vol. 51(1), pages 49-78, June.
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  12. Mark L. Gertler, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," NBER Working Papers 2559, National Bureau of Economic Research, Inc.
  13. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, December.
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  16. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
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