Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account
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.
|Date of creation:||Jun 1988|
|Date of revision:|
|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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- Torsten Persson & Lars E.O. Svensson, 1983.
"Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later,"
NBER Working Papers
1129, National Bureau of Economic Research, Inc.
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- Maurice Obstfeld, 1981.
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NBER Working Papers
0686, National Bureau of Economic Research, Inc.
- Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 251-70, May.
- 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.
- Sebastian Edwards, 1987. "Anticipated Protectionist Policies, Real Exchange Rates and the Current Account," UCLA Economics Working Papers 437, UCLA Department of Economics.
- 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.
- Neary, J Peter, 1985. "International Factor Mobility, Minimum Wage Rates, and Factor-Price Equalization: A Synthesis," The Quarterly Journal of Economics, MIT Press, vol. 100(3), pages 551-70, August.
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