Working Paper: NBER ID: w0779
Authors: Rudiger Dornbusch
Abstract: The paper investigates the optimal tire path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rates. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home gods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in interest rates.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| home real interest rate (E43) | world real interest rate (E43) |
| rising relative price of home goods (R31) | home real interest rate < world real interest rate (E43) |
| falling relative price of home goods (D19) | home real interest rate > world real interest rate (E43) |
| disturbances in output (D57) | consumption decisions (D12) |
| home real interest rate < world real interest rate (E43) | dampening of consumption effects (E21) |