current account dynamics and expected future budget deficits some international evidence abstract this paper addresses the question of whether current account deficits are linked to expected future budget deficits we use an optimizing general equilibrium model to show the theoretical relationship between the two deficits we then estimate the econometric equation based on the forward looking expectations model for oecd countries thus extending earlier research based on more conventional analysis from the empirical investigation evidence is obtained that strongly supports the view that current account deficits have been associated with expected future budget deficits during the 1970 1997 period

habits costly investment and current account dynamics abstract we analyze the current account dynamics for a small country model with habit forming consumers and costly investment the model has several empirical and policy implications i it is consistent with stylized facts regarding the effects of productivity shocks and increases in fiscal spending and regarding the savings investment co movement ii the long run effect of a temporary shock on net foreign assets is often opposite to that of a permanent shock iii under strong habit persistence the welfare dynamics are sluggish so that a beneficial tax financed fiscal policy may have a harmful hangover effect on welfare

liberalization of capital movements and of the domestic financial system this paper analyzes the dynamic impact of a joint liberalization of capital movements and of the domestic financial sector both a simultaneous and a sequential liberalization are examined in an overlapping generations model with a q theory of investment a liberalization generally leads to an initial period of capital inflows followed by capital outflows it also increases investment and causes an overshooting in share prices furthermore the interest rate level before a liberalization will usually not indicate the direction of net capital flows copyright 1992 by the london school of economics and political science

electricity transition in the middle east and north africa a de risking governance approach high upfront costs and investment risks constitute critical barriers for investments in low carbon infrastructure technologies in the middle east and north africa this article uses a case study of morocco s solar strategy for the electricity sector in order to explore how domestic versus regional multilateral governance structures impact upon the downside risk of clean energy investments and translate into lower financing costs we firstly process trace the differential effects of governance on policy and financial de risking intended as risk reduction and risk transfer then we quantify the impact of policy and financial de risking on the financing costs of the ouarzazate csp noor 1 project our results suggest that i policy and financial de risking depended on a clear policy commitment of the government to develop solar electricity a strong domestic institutional capacity to transform commitment into concrete projects as well as a strong commitment of development finance institutions at project level our results suggest that ii lower financing cost depended on concessional finance provided by multiple lenders proactive policy de risking efforts taken at domestic level and the competitive auction besides the expected impact of concessional finance these findings lend qualitative quantitative support to the argument that domestic policy de risking pay off unlocking concessional finance and reducing the private investors required return from the project therefore governments of the middle east and north africa countries should pursue any efforts in implementing or enhancing policy de risking measures under the emerging post 2020 climate policy regime new instruments might also incorporate a focus on investment risks through country specific technical and financial assistance however our analysis suggests that electricity policy legacies and practices are hard to change in the middle east and north africa therefore technical and financial assistance should target especially those areas that have a particular policy de risking potential namely capacity building on project assessment project finance and grid management

perception of risks in renewable energy projects the case of concentrated solar power in north africa the world needs to reduce greenhouse gas emissions to prevent climate change while meeting the energy needs of developed and developing economies recent studies suggest that generation of electricity from concentrated solar power in north african countries and its transmission to europe could provide european and north african partners with low carbon electricity the private capital will be likely required to achieve the scale of new investment and yet the north african region experience difficulties with sustaining high levels of foreign direct investment from the private sector the literature identifies a number of risks as barriers to investment and we examine these in the particular context of renewable energy development we conducted three stages of interviews with stakeholders to learn their perceptions of the risks most likely to affect renewable energy projects three class of risks regulatory political and force majeure which includes terrorism stand out as being of high concern of these regulatory risks are perceived as being the most consequential and the most likely to occur this suggests that attention to building the capacities of north african countries to develop implement and enforce sound regulations in a transparent manner could be an important step in promoting renewable energy cooperation with europe

a simple model of sectoral adjustment despite the significance of limited labour mobility across sectors few attempts have been made to produce dynamic models of sectoral adjustment which are consistent with perfect foresight and yet flexible enough to allow for a variety of dynamic experiments this paper proposes a simple perfect foresight model of two sector economies in which aggregate sectoral movement of labour takes place through the process of demographic change the model is tractable enough that one can easily examine the effects of intertemporally complicated relative price shocks both exogenous and endogenous under a variety of assumptions on technology

the current account in the macroeconomic adjustment process macroeconomic adjustments to changes in the economic environment are to a large extent conditioned by the intertemporal choices of economic agents when agents face an intertemporal budget constraint a decision to alter current indebtedness implies changes in future consumption possibilities and will be based on expectations of the entire future path of key variables and not only current variables a formal model to show how today s current account is a function of both current and future economic variables is presented the determination of the current account under classical assumptions of market clearing and continuous full employment is emphasized

on exchange rate stabilization abstract this paper extends calvo s 1986 and obstfeld s 1985 analyses of stabilization policies through predetermined exchange rates in a few directions the graphic and analytical techniques used here make it possible to perform a variety of policy experiments under a general utility function and in the presence of a consumer durable good or under time nonseparable preferences it also shows that the dynamic process of exchange rate stabilization exhibits hysteresis effects that is the steady state behavior of the economy depends on the initial condition and a temporary stabilization policy has a permanent effect on the economy

habits and durability in consumption and the dynamics of the current account abstract a model in which consumption exhibits durability and habits develop over the flow of services provided by them is used to study current account dynamics durability leads to adjacent substitutability in consumption while habits are assumed to lead to adjacent complementarity the adjustment of the current account may be non monotonic if habit effects are dominant in the short run and durability effects in the long run then after a terms of trade deterioration we will have a current account deficit followed by a surplus the j curve in the opposite case a surplus will be followed by a deficit 1998 elsevier science b v

terms of trade shock and the current account in a monetary economy over the period 1973 81 the terms of trade of non oil developing countries deteriorated at about 2 per cent per annum this was accompanied by an increase in current account deficits in excess of 3 per cent above what they had been in the previous decade see khan and knight 1983 for a discussion these authors find the terms of trade shocks the major cause of the deficits this has led to a renewal of interest in the effects of changes in terms of trade for a small open economy the conventional wisdom first put forward by laursen and metzler 1950 and harberger 1950 emphasized the fact that a terms of trade worsening lowered real income which in turn lowered savings and worsened the current account the laursen metzler effect the recent reappraisal was initiated by obstfeld 1982 he showed in an infinite horizon optimizing framework with perfect capital mobilizing that if the discount rate was a function of the level of utility surpluses and not deficits accompany an unanticipated and permanent terms of trade worsening the long run level of the discount rate is tied down by the given world rate of interest this in turn fixes the long run level of utility the terms of trade shock tends to lower the level of utility and agents save to offset this across steady states there is only a substitution effect on the other hand if the discount rate is fixed and equal to the world interest rate then the economy adjusts to the terms of trade shock by immediately lowering real expenditure by the same amount as the decline in real income so that the current account is always balanced svensson and razin 1983 showed that in a two period framework this does not necessarily happen for the infinite horizon case they showed that if preferences were separable over time and the discount rate was increasing in instantaneous utility then obstfeld s results were indeed obtained in a two period overlapping generations model the results could be modified owing to the fact that human wealth and non human wealth are not perfect substitutes and a terms of trade shock affects these differently see matsuyama 1988 for a discussion but it is still true that an unanticipated permanent terms of trade shock has a one shot effect on the current account unless some ad hoc costs of adjustment are introduced see e g persson and svensson 1985 and matsuyama 1988 the uncertain lifetime model see e g frenkel and razin 1988 and matsuyama 1987 generates non trivial

aggregate spending and the terms of trade is there a laursen metzler effect this paper investigates the spending and current account effects of terms of trade shifts in a model where households maximize utility over an infinite planning period in the framework developed here an economy specialized in production must experience a fall in aggregate spending and a current surplus as a result of an unanticipated permanent worsening in its terms of trade the paper s model thus provides a setting in which the current account deficit predicted by laursen and metzier harberger and others fails to materialize

imported input price and the current account in an optimizing model without capital mobility abstract this paper analyses the effect of an oil price increase in an economy which cannot borrow in the international capital markets current account surpluses and deficits are matched by reserve changes at the central bank it is shown in an optimizing setup that an unanticipated oil price increase worsens the current account and lowers the real interest rate contrary to models which assume perfect capital markets

de risking concentrated solar power in emerging markets the role of policies and international finance institutions abstract concentrated solar power csp is a promising technology for low carbon energy systems as combined with thermal storage it can store solar energy as heat and deliver power more flexibly and when most needed by the grid however its high cost prevents its rapid deployment and affects its affordability in emerging economies international financial institutions ifis have emerged as key players to enable csp in emerging economies especially when cooperating with national policymakers through the analysis of two csp plants in india and morocco where ifis provided the lion s share of finance this paper aims to assess the effectiveness of their support and estimate the impact of ifis financing on electricity production costs and mobilization of private investments the two case studies show that public financial institutions can play a leading role in reducing the cost of csp support on public budgets by providing concessional loans in countries where public and or private finance would be too expensive or extending maturities where commercial investors are present but poorly suited for project finance finally we show that combined with competitive tariff setting mechanism tenders and auctions public financial support can also be a cost effective tool to engage private investors in csp

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

current account dynamics and the terms of trade harberger laursen metzler two generations later this is a study of the current account dynamics resulting from the savings and investment dynamics in a small open economy which is subject to exogenous changes in its terms of trade and in world interest rates anticipated and unanticipated as well as temporary and permanent terms of trade changes have very different effects there is however a general tendency towards cycles in both savings and investment which gives rise to cycles in the current account it is shown that the classic harberger laursen metzler effect on saving of a terms of trade deterioration can have any sign for plausible parameter values both for temporary and permanent disturbances

eliminating interest taxation and tariffs the underpinnings for recent canadian policy blanchard s 1985 formulation of the overlapping generations model and the so cial welfare function advocated by calvo and obstfeld 1988 are used to analyse interest taxation and tariffs in a small open economy when the revenue lost from the elimination of these taxes is replaced by raising the tax on labour as in recent canadian experience a low social discount rate is required for the model to support lower interest income taxes while a high discount rate is needed to support the elimination of tariffs we illustrate the empirical importance of this simultaneous need for both a high and a low discount rate eliminer l imposition des revenus d interet et les droits de douane les soubassements de la politique canadienne re cente les auteurs utilisent la formulation blanchard du modele des generations qui se chevauchent et la fonction de bien etre social de calvo et obstfeld pour analyser les effets de l imposition des revenus d interet et des droits de douane dans une petite economie ouverte quand la perte de revenus attribuable a l elimination de ces taxes est comblee par un imp6t sur le travail comme ce fut le cas au canada il faut postuler un taux d escompte social bas pour qu on puisse endosser une politique de reduction de l imposition des revenus d interet alors qu il faut postuler un taux d escompte social eleve pour endosser une politique de reduction des droits de douane les auteurs montrent l importance empirique de cette necessite d avoir un taux d escompte a la fois bas et haut

can money always talk implication for environmental compensation by international agribusiness abstract with the development of agricultural industrialization the environmental issues of intensive animal farming are attracting increasing attention using survey data from 313 chinese households living near large scale broiler farms of an international food company this paper employs a contingent valuation method and discrete choice experiment to quantify the willingness to accept an air pollution compensation scheme the findings are as following 1 42 of respondents have a nonmonetary preference for compensation thus the conventional contingent valuation method is unsuitable for application to them 2 the results of a sample selection model show that in addition to income trust and subjective factors dominate decision making based on willingness to accept however the effect of actual distance is weak 3 the combination of nonmonetary options is feasible and beneficial for both the company and local residents in the long term this paper distinguishes between the wta with regard to monetary and nonmonetary ecological compensation measure ecm and it develops a methodological approach that allows the development of wta based monetary and non monetary to establish compensation guidelines for international food companies our study focuses on a case study of a major foreign company providing an example to other similar multi national businesses for sustainable development strategy in developing countries

deterioration of the terms of trade and capital accumulation a reexamination of the laursen metzler effect abstract this paper analyzes the effect of both a permanent and a temporary deterioration in the terms of trade on a small open economy the model based on intertemporal optimization emphasizes the labor leisure choice and the role of capital accumulation the transitional dynamics is shown to depend upon the long run response of the capital stock to the terms of trade shock this consists of a negative substitution effect together with a positive income effect whether or not the laursen metzler effect holds depends upon whether the income effect dominates the substitution effect

the harberger laursen metzler effect under capital market imperfections abstract this paper re examines the effects of a permanent terms of trade change on a dynamic small open economy facing an imperfect world capital market as studied in obstfeld 1982 aggregate spending and the terms of trade is there a laursen metzler effect quarterly journal of economics 97 251 270 which assumes that the economy faces a downward sloping bond curve the novelty of the present paper is that a saddle path stable steady state comes into existence under the assumption that households subjective discount rate is a decreasing function of instantaneous utility the harberger laursen metzler hlm effect is shown to hold unambiguously i e an unanticipated permanent terms of trade deterioration leads to an increase in aggregate expenditure and a current account deficit this result is in stark contrast to those obtained in obstfeld 1982 aggregate spending and the terms of trade is there a laursen metzler effect quarterly journal of economics 97 251 270 and many other studies in the literature

the growth and welfare consequences of differential tariffs this paper analyzes the impact of differential tariffs on consumption and investment in a specific factors model of a small open economy in which capital is accumulated over time particular attention is devoted to the welfare aspects highlighting the cost of the intertemporal distortions produced by protective trade policies several specific welfare propositions are obtained first tariff protection is shown to create short run benefits but long run costs in welfare second the second best policy for the two tariffs is characterized finally several propositions summarizing the implications of our analysis for tariff reform are derived

some macroeconomic effects of nationalizing private sector foreign debt abstract in the recent debt crisis years many governments have adopted foreign debts of their domestic private sectors this paper uses a simple small open economy version of blanchard s 1985 overlapping generations model to demonstrate that such a policy encourages the accumulation of national foreign debt and can contribute to higher inflation because individuals have finite lives they fail to fully internalize the government s intertemporal budget constraint current generations therefore regard the debt relief as an increase in wealth they raise consumption which causes current account deficits future generations have to lower consumption to service the additional debt the debt service takes the form of a higher inflation tax if the government tries to stabilize exchange rates while nationalizing debt both the debt and inflation problems are exacerbated

accumulation and growth in a two country model a simulation approach abstract this paper analyzes saving and capital accumulation in a two good growth model of two market economies in which economic agents optimize with perfect foresight the goal is to present a model in which short run dynamics and the steady state are soundly integrated we stress the importance of asset markets as the linkage that transmits disturbances both internationally and intertemporally while many components of the model described below can be found in the literature on optimal consumption investment and international growth models we provide a consistent synthesis our framework permits the analysis of structural adjustment in the global economy and the dynamic effects of a wide range of public policies

agricultural trade distortions during the global financial crisis the authors are grateful for financial support from the australian research council rural industries research and development corporation and world bank

demand changes and real exchange rate dynamics in a finite horizon model with sectoral adjustment costs author affiliation hung ju chen department of economics national taiwan university 21 hsu chow road taipei 100 taiwan e mail hjc ntu edu tw corresponding author chen min hsu department of economics national taiwan university 21 hsu chow road taipei 100 taiwan e mail chenmin ntu edu tw acknowledgment we would like to acknowledge the financial support provided by the program for globalization studies at the institute for advanced studies in humanities national taiwan university grant 95r0064 ah03 03 we wish to express our sincere appreciation for helpful comments and suggestions provided by two anonymous referees the editor of the journal joshua aizenman been lon chen ming chia li tsunao okumura and elias sanidas as well as participants at the 2007 annual conference of the asia pacific economic association and the 2007 conference of korea and the world economy we also thank ke shaw lian for his assistance any errors within the work are our responsibility 1 introductionalthough the traditional macroeconomic models tend to explain economic fluctuations by focusing solely on supply shocks given that equilibrium is determined by both demand and supply it would seem obvious that changes in demand may also have important effects in terms of their contribution to economic oscillations changes in demand can easily occur particularly for those small open economies for example small open economies can be easily disturbed by external shocks such as terms of trade shocks through international trade 1 another example is the reduction in the mortality rate as a result of higher health investment both public and private and better healthcare during the economic development 2 for export orientated growth economies in particular such as those of hong kong and taiwan changes in either the terms of trade or the mortality rate can significantly influence economic performance impacting the real exchange rate investment output savings and the current account the phenomenon that life expectancy is steadily lengthening for most developing countries has led to the emergence of a growing number of studies on the impact of population aging 3 since an increase in life expectancy will change the expectation of lifetime utility it will directly affect households inter temporal decisions with regard to consumption and savings however previous studies tend to analyze the impact of mortality decline in a closed economy or in a small open economy with exogenous and constant factor prices 4in order to study the impact of mortality rate changes on the economic performance in an open economy we use the overlapping generations model with uncertain lifetime developed by yaari 1965 and blanchard 1985 to examine household savings behavior within this model agents live with a finite lifetime such that different types of agents simultaneously live in the economy 5 furthermore we extend the blanchard type model to a three good open economy composed of exportable importable and non traded goods to allow us to consider the dynamics of the real exchange rate when demand changes capital production and accumulation are also incorporated into the framework to facilitate an examination of the investment behavior of firms we assume that the economy uses both capital and labor to produce exportable goods and non traded goods while importable goods are imported from abroad capital is produced by the non traded sector and installation costs are incurred when capital is transported to the exportable sector 6 as indicated by morshed and turnovsky 2004 the inclusion of the sectoral adjustment costs of capital can generate persistent deviations from the long run equilibrium by the real exchange rate in response to demand changes 7 because the real exchange rate is playing a dual role of a non traded goods price and a capital price we are able to study the impact of population aging and terms of trade shocks on international capital flows in a small open economy with endogenous factor prices

solar power investment in north africa reducing perceived risks abstract climate protection targets for mid century imply a need to scale up european renewable power production to a level that may exceed the available land area within europe s borders one attractive solution from a cost and feasibility perspective is the development of large scale concentrating solar power plants in north africa and the middle east however these developments are seen by many people as risky in terms of both european energy security and in terms of the risks faced by project developers in this paper we focus on the latter of theses issues first we examine the risks that project developers are most concerned about and identify these as being associated not with terrorism and rogue state behavior but rather with corruption and inefficient and unpredictable bureaucracies second we identify a range of policy approaches that can reduce these risks either by mitigating their consequences or by seeking to eliminate their underlying causes third we investigate the financial benefits of taking such steps to reduce or eliminate investment risks we find the potential savings to european electricity consumers to exceed 200 billion

estimating saving investment correlations evidence for oecd countries based on an error correction model abstract saving investment correlations are important stylized facts in open economy macroeconomics and indicators of capital mobility they are best estimated by an error correction model ecm because an ecm is consistent with intertemporal general equilibrium models the ecm is a synthesis of previous approaches applying the ecm to the oecd countries we find that in general saving and investment are cointegrated the ecm is more powerful in detecting cointegration than the two step engle granger procedure estimates of the saving investment correlation are robust with respect to overdifferencing we find evidence of a large country effect and an increase in capital mobility within the oecd area

current account dynamics in a finite horizon model abstract this paper examines the response of the current account in a small open economy to a permanent change in the price of imported intermediate goods to do so it extends blanchard s 1985 open economy model to incorporate the capital stock with adjustment costs a la hayashi 1982 a price increase in imported intermediate goods can be viewed as a combination of transfer payments abroad and capital taxation the former effect leads to a current account deficit and the latter leads to a current account surplus the overall effect depends on the relative magnitude of these effects

foreign exchange liberalization and the viability of a fixed exchange regime abstract this paper investigates the effect of liberalization of capital account transactions on the viability of a fixed exchange regime using a finite time horizon model a la blanchard the paper demonstrates a case where removal of restrictions on capital outflows alone can cause a balance of payments crisis in the absence of any other external shocks the increased burden of debt service as well as the dynamics of the economy after liberalization are identified as potential sources of reserve outflow the paper also discusses the dynamics of the economy when liberalization is expected to force the central bank to give up exchange rate pegging

spill over effects of supply side changes in a two country economy with capital accumulation abstract using a two country dynamic optimization model with capital accumulation we explore the effect of such supply side changes as a rise in productivity and a reduction in the corporate tax rate on the equilibrium path and the welfare of two countries the welfare effect consists of a tax distortion term and a wealth term those supply side changes in the creditor country increase its welfare but unambiguously decrease the debtor country s welfare as capital moves from the debtor country to the creditor country

scaling up finance for off grid renewable energy the role of aggregation and spatial diversification in derisking investments in mini grids for rural electrification in india abstract today about 1 1 billion people lack access to electricity worldwide it is estimated that annual investments of 48 billion usd are required to meet the target of the sustainable development goals of providing universal electricity access by 2030 the need for private investments to meet this target is evident but small scale electrification projects are often unattractive for private investors due to unfavourable risk return profiles and small investment volumes both issues can potentially be addressed by aggregating projects into diversified portfolios an approach commonly used by investors in several contexts but little investigated in the context of rural electrification this paper addresses the question of how spatial diversity in a portfolio can be used to reduce investment risks and increase investment volumes through a mixed method approach involving three steps i identification and classification of investment risks for renewable energy mini grid projects ii qualitative analysis of the correlations between investment risks for different projects through interviews and iii quantitative estimation of the cost of capital and derisking effects of spatial diversification strategies for an experimental portfolio in india we discuss the implications for policymakers in promoting and facilitating the ability of private sector investors to aggregate small scale electrification investments

an optimizing analysis of the effects of world interest disturbances on the open economy term structure of interest rates abstract this paper studies the effects of world interest rate disturbances on the real domestic term structure of interest rates an intertemporal optimizing representative agent framework with variable employment and endogenous terms of trade is developed the economy faces an external borrowing constraint the adjustment of the short and long term rates as well as the discount bond yield curve is distinguished with the long rate and the yield curve derived recursively from the short both permanent and temporary world interest shocks are considered a notable result is that the yield curve exhibits relative maxima and minima for temporary disturbances

capital income taxation in a growing open economy abstract the paper studies the dynamic macroeconomic effects of various forms of capital income taxation in a model of a small open economy with perfect mobility of financial capital and intertemporal optimization on the part of households and firms one of the noteworthy results is that the introduction of a low corporate income tax will not affect consumption in the long run but will simply lead to a replacement of shares by foreign financial assets in household portfolios it is also found that an anticipated investment tax credit can have and that an anticipated dividend tax will have contractionary effects on investment before they are introduced moreover it is shown that while an unanticipated dividend tax is neutral with respect to investment it will have real effects on consumption and net foreign assets in a growing economy

oil prices welfare and the trade balance the paper examines welfare effects and the trade balance response to changes in the world oil prices and interest rates for a small oil importing economy the trade balance is mainly seen as the difference between saving and investment and these are derived from intertemporal optimization it is shown that the welfare effects consist of static terms of trade effects intertemporal terms of trade effects and employment effects the trade balance deteriorates for temporary oil price increases whereas its response is ambiguous for permanent oil price increases for a fall in the world interest rate the trade balance deteriorates if the economy is a net borrower

current account determination with traded capital goods abstract a model of real current account determination in a small open economy with many final goods sectors and traded capital goods is presented the model emphasizes the ambiguity of investment response and encourages sector specific empirical methods

capital income taxation and the current account in a small open economy abstract this paper analyzes the effects of capital income taxation on the current account noting the difference between two international tax rules the residence principle and the source principle an increase in the residence tax rate reduces foreign asset holdings in the long run and creates a current account deficit on the other hand an increase in the source tax rate increases long run foreign asset holdings because the king fullerton 1984 effective tax rate responds positively to the increase in both taxes it does not predict the effects of taxation on the direction of international capital investments

current accounts in debtor and creditor countries the authors reexamine a classic question in international economics what is the current account response to a transitory income shock such as a temporary improvement in the terms of trade a transfer from abroad or unusually high production to answer this question they construct a world equilibrium model in which productivity varies across countries and international borrowing and lending take place to exploit good investment opportunities despite its conventional ingredients the model generates the novel prediction that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries evidence from thirteen oecd countries broadly supports this theoretical prediction

dynamic analysis in the viner model of mercantilism abstract this paper models the central theme of mercantilism in jacob viner s interpretation power vs plenty in a framework of modern theory of international finance it is shown that in the viner model of mercantilism a nation with strong mercantilist sentiment ends up with large foreign asset accumulation and high consumption in the long run an import tariff leads to more foreign asset holding and more total consumption furthermore in the viner model the harberger laursen metzler effect exists unambiguously a permanent terms of trade deterioration causes a current account deficit in the short run

current account effects of a devaluation in an optimizing model with capital accumulation abstract this article explores the consequences of a devaluation in the context of a real optimizing model of a small open economy what provides for real effects of the devaluation is the existence of nominal wage stickiness during a contract period we show that if this contract period is relatively short the devaluation is bound to improve the current account on impact whereas this will deteriorate in the case of a long contract period and the more so the smaller are adjustment costs in investment in addition we study the consequences for the terms of trade and for the stocks of foreign assets and of capital

capital controls and international trade finance abstract this paper studies the effects of prohibiting individuals from holding foreign assets but of allowing firms to trade in foreign assets only up to what is needed to finance export and import activities although firms can perform arbitrage between domestic and foreign financial markets the distortions in asset markets are not fully arbitraged away but instead are transmitted to domestic goods markets the dynamics and steady state responses to a variety of shocks are crucially affected by capital controls even in the presence of capital controls the volatility of domestic interest rates can be substantial