Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account

Abstract

In this paper a general equilibrium intertemporal model with optimizing consumers and producera ia developed to analyze how the temporary term's of trade diaturbances 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 considera a small open economy that produces and consumes three goods each period.It is shown that, without imposing rigidities or adjust- ment 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 misalignrent and overvaluarion.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 85 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.