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

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  • Sebastian Edwards

Abstract

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.

Suggested Citation

  • Sebastian Edwards, 1988. "Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account," NBER Working Papers 2629, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2629
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    1. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(2), pages 251-270.
    2. van Wijnbergen, Sweder, 1985. "Taxation of International Capital Flows, the Intertemporal Terms of Trade and the Real Price of Oil," Oxford Economic Papers, Oxford University Press, vol. 37(3), pages 382-390, September.
    3. Razin, Assaf & Svensson, Lars E. O., 1983. "Trade taxes and the current account," Economics Letters, Elsevier, vol. 13(1), pages 55-57.
    4. Sebastian Edwards, 1987. "Anticipated Protectionist Policies, Real Exchange Rates and the Current Account," UCLA Economics Working Papers 437, UCLA Department of Economics.
    5. Persson, Torsten & Svensson, Lars E O, 1985. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 43-65, February.
    6. J. Peter Neary, 1985. "International Factor Mobility, Minimum Wage Rates, and Factor-Price Equalization: A Synthesis," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(3), pages 551-570.
    7. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
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    Cited by:

    1. Özlem Onaran & Engelbert Stockhammer, 2006. "The effect of FDI and foreign trade on wages in the Central and Eastern European Countries in the post-transition era: A sectoral analysis," Department of Economics Working Papers wuwp094, Vienna University of Economics and Business, Department of Economics.
    2. Michael R. Pakko, 1996. "Tariff risk and international borrowing with incomplete asset markets," Working Papers 1996-011, Federal Reserve Bank of St. Louis.
    3. Michael J. Dueker, 1995. "Tariffs and asset market structure: some basic comparative dynamics," Working Papers 1995-009, Federal Reserve Bank of St. Louis.
    4. Fallon, Peter R. & Riveros, Luis A., 1989. "Adjustment and the labor market," Policy Research Working Paper Series 214, The World Bank.
    5. Graciela Moguillansky, 1995. "¿Existe una Brecha Respecto del Sendero de Equilibrio Cambiario en el Perú? Un Análisis Empírico para el Período 1980-1994," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 32(97), pages 379-410.
    6. Graciela Moguillansky, 1996. "¿Existe una brecha cambiaria en el Perú?," Apuntes. Revista de ciencias sociales, Fondo Editorial, Universidad del Pacífico, vol. 23(38), pages 41-71.

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