NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Sebastian Edwards

NBER Working Paper No. 2629 (Also Reprint No. r1383)
Issued in June 1988
NBER Program(s):   ITI   IFM

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.

download in pdf format
   (274 K)

download in djvu format
   (175 K)

email paper

This paper is available as PDF (274 K) or DjVu (175 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w2629

Published:

Users who downloaded this paper also downloaded these:
De Gregorio and Wolf w4807 Terms of Trade, Productivity, and the Real Exchange Rate
Edwards w2175 Tariffs, Terms of Trade, and the Real Exchange Rate in an Intertemporal Optimizing Model of the Current Account
Edwards and van Wijnbergen w2365 Tariffs, the Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics
Persson and Svensson w1129 Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later
Lee and Chinn w6495 The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies
 
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