Working Paper: NBER ID: w0686
Authors: Maurice Obstfeld
Abstract: This paper investigates the spending and current-account effects of permanent terms-of-trade shifts in a model where households maximize utility over an infinite planning period. In the framework we adopt, an economy specialized in production must experience a fall in aggregate spending and a current surplus when the terms of trade permanently deteriorate The model thus provides a counter-example to the argument of Laursen and Idetzler (1950) and Harberger (1950) that a permanent worsening in the terms of trade must produce a current-account deficit.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent deterioration in terms of trade (F14) | current account surplus (F32) |
| Permanent deterioration in terms of trade (F14) | change in consumption and saving behaviors (E21) |
| change in consumption and saving behaviors (E21) | current account surplus (F32) |
| Households smoothing consumption paths (D15) | change in consumption levels (E21) |