IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Dynamic response to foreign transfers and terms-of-trade shocks in open economies

  • Schmidt-Hebbel, Klaus
  • Serven, Luis

The transmission of shocks and policy changes depends crucially on the structure of the economy. The authors analyze the impact of two classes of external shocks in open economies, using a rational-expectations framework that tests three prototype economies: (1) a neoclassical, full-employment benchmark economy, with intertemporally optimizing consumers and firms and instantaneous clearing of asset, goods, and factor markets; (2) a full employment economy, with partly liquidity-constrained consumers and investors; and (3) a Keynesian economy exhibiting both liquidity constraints and wage rigidity, which results in transitory unemployment. Their model is forward-looking in that the short-run equilibrium of the economy depends on current and expected future values of all exogenous variables, and displays hysteresis (that is, its long-run equilibrium is path dependent). Using parameters for a representative open economy, they simulate and compare the dynamic effects of foreign transfers and of terms-of-trade windfall in the form of a lower price for an imported production input. They contrast the role of Keynesian elements with the neoclassical factors in determining the dynamic adjustment to shocks, by analyzing the effectsof permanent/transitory and anticipated/unanticipated disturbances in the three prototype economies. The results illustrate three main points: (i) both permanent and transitory disturbances cause changes in long-run capacity and output; (ii) transitory and permanent shocks may have opposite effects on the current account; in particular, a permanent favorable foreign shock produces a current account deficit, while a transitory favorable shock induces a current account surplus; and (iii) liquidity constraints and wage rigidities tend to amplify the cyclical adjustment to external shocks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/1999/04/30/000009265_3961003200017/Rendered/PDF/multi0page.pdf
Download Restriction: no

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1061.

as
in new window

Length:
Date of creation: 31 Dec 1992
Date of revision:
Handle: RePEc:wbk:wbrwps:1061
Contact details of provider: Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Web page: http://www.worldbank.org/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
  2. Francesco Giavazzi & Charles Wyplosz, 1984. "The Real Exchange Rate, the Current Account, and the Speed of Adjustment," NBER Chapters, in: Exchange Rate Theory and Practice, pages 335-356 National Bureau of Economic Research, Inc.
  3. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear RationalExpectations Models," NBER Technical Working Papers 0005, National Bureau of Economic Research, Inc.
  4. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  5. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  6. Turnovsky, S.J. & Sen, P., 1990. "Fiscal Policy, Capital Accumulation, And Debt In An Open Economy," Working Papers 90-18, University of Washington, Department of Economics.
  7. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  8. Buiter, W, 1982. "Saddlepoint Problems in Continuous Time Rational Expectations Models : A General Method and Some Macroeconomic Examples," The Warwick Economics Research Paper Series (TWERPS) 200, University of Warwick, Department of Economics.
  9. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  10. B. Douglas Bernheim, 1987. "Ricardian Equivalence: An Evaluation of Theory and Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 263-316 National Bureau of Economic Research, Inc.
  11. P. Krugman & L. Taylor, 1976. "Contractionary Effects of Devaluations," Working papers 191, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. R. Glenn Hubbard & Kenneth L. Judd, 1986. "Liquidity Constraints, Fiscal Policy, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 1-60.
  13. Nadeem U. Haque & Kajal Lahiri & Peter J. Montiel, 1990. "A Macroeconometric Model for Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 37(3), pages 537-559, September.
  14. Giavazzi, Francesco & Odekon, Mehmet & Wyplosz, Charles, 1982. "Simulating an oil shock with sticky prices," European Economic Review, Elsevier, vol. 18(2), pages 11-33.
  15. Giavazzi, Francesco & Wyplosz, Charles, 1985. "The Zero Root Problem: A Note on the Dynamic Determination of the Stationary Equilibrium in Linear Models," Review of Economic Studies, Wiley Blackwell, vol. 52(2), pages 353-57, April.
  16. Warwick J. McKibbin & Jeffrey D. Sachs, 1989. "The McKibbin-Sachs Global Model: Theory and Specifications," NBER Working Papers 3100, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1061. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.