NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Tariffs, Terms of Trade, and the Real Exchange Rate in an Intertemporal Optimizing Model of the Current Account

Sebastian Edwards

NBER Working Paper No. 2175
Issued in February 1987
NBER Program(s):   ITI   IFM

In this paper a minimal general equilibrium intertemporal model, with optimizing consumers and producers, is developed to analyze the process of real exchange rate determination. The model is completely real, and considers a small open economy that produces and consumes three goods each period. The model is also used to analyze the way in which the current account responds to several shocks. The working of the model is illustrated for the case of two disturbances: the imposition of import tariffs, and external terms of trade shocks. In the case of import tariffs, a distinction is made between temporary, anticipated, and permanent changes. It is shown that, without imposing rigidities or adjustment costs, interesting paths for the equilibrium real exchange rate can be generated. In particular "overshooting" and movements in opposite directions in periods one and two can be observed. Precise conditions under which temporary import tariffs will improve the current account are derived. Finally, several ways in which the model can be extended to take into account other issues such as changes in the fiscal deficit, and financial deregulation are discussed in detail.

download in pdf format
   (295 K)

email paper

This paper is available as PDF (295 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2175

Published:

  • and the Current Account", Economica, Vol. 56, no. 223 (1989): 343-358. ,
  • (With J. Ostry) Published as "Anticipated Protectionist Policies, Real Exchange Rates, and the Current Account: The Case of Rigid Wages",Journal of International Money and Finance, Vol. 9, no. 2 (1990). Published as "Temporary Terms-to-Trade Disturbances, the Real Exchange Rate

Users who downloaded this paper also downloaded these:
Edwards w2629 Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account
De Gregorio and Wolf w4807 Terms of Trade, Productivity, and the Real Exchange Rate
Edwards Trade Policy, Exchange Rates, and Growth
Engel and Kletzer w1869 Tariffs, Saving and the Current Account
Persson and Svensson w1129 Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us