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The Effects of Currency Substitutionon the Response of the Current Account to Supply Shocks

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  • International Monetary Fund

Abstract

Standard real models predict that a permanent increase in oil prices would result in a current account surplus. This is due to the fact that investment falls while saving remains unchanged. This paper shows that if currency substitution is introduced into the analysis, the same shock could cause a current account deficit. Furthermore, the higher the dependence of the economy on oil, the larger would be the deficit. The presence of foreign money makes it optimal for the public to decrease saving following the terms of trade deterioration. The fall in saving could be larger than the decline in investment.

Suggested Citation

  • International Monetary Fund, 1988. "The Effects of Currency Substitutionon the Response of the Current Account to Supply Shocks," IMF Working Papers 1988/005, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1988/005
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=28247
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    Cited by:

    1. Alberto Giovannini & Bart Turtelboom, 1992. "Currency Substitution," NBER Working Papers 4232, National Bureau of Economic Research, Inc.

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