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Intermediate Imports, the Terms of Trade, and the Dynamics of the Exchange Rate and Current Account

  • Maurice Obstfeld

This paper studies the macroeconomic effects of an increase in the price of an imported intermediate production input. The framework of the analysis is a small open economy with abating exchange rate and endogenous terms if trade, in which saving depends on residents'(variable) rate of time preference. Contrary to popular conceptions, an intermediate price shock may lead to an appreciation of the exchange rate in both the short run and the long run, and is likely to occasion a current-account surplus. The terms of trade between foreign and domestic finished goods always improve in the long run.

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File URL: http://www.nber.org/papers/w0540.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0540.

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Date of creation: Sep 1980
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Publication status: published as Obstfeld, Maurice. "Intermediate Imports, the Terms of Trade, and the Dynamics of the Exchange Rate and Current Account." Journal of International Economics, Vol. 10, No. 4, (November 1980), pp. 461-480.
Handle: RePEc:nbr:nberwo:0540
Note: ITI IFM
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  1. Van Duyne, Carl, 1979. "The macroeconomic effects of commodity market disruptions in open economies," Journal of International Economics, Elsevier, vol. 9(4), pages 559-582, November.
  2. P. Krugman & L. Taylor, 1976. "Contractionary Effects of Devaluations," Working papers 191, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Ronald E. Findlay & Carlos Alfredo Rodriguez, 1977. "Intermediate Imports and Macroeconomic Policy under Flexible Exchange Rates," Canadian Journal of Economics, Canadian Economics Association, vol. 10(2), pages 208-17, May.
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