Working Paper: NBER ID: w1129
Authors: Torsten Persson; Lars E.O. Svensson
Abstract: The current account dynamics is examined for a small open economy which is subject to exogenous changes in its static terms of trade and in world interest rates. The model used is one with overlapping finite-lived generations, which we argue gives rise to a more reasonable saving behaviour than previously used models with infinite lived consumers.In particular no restrictions on the rate of time preference is required.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.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.
Keywords: current account; terms of trade; savings; investment; overlapping generations model
JEL Codes: F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipated permanent terms of trade deterioration (F19) | increase in home goods (D19) |
| anticipated permanent terms of trade deterioration (F19) | increase in real interest rates (E43) |
| increase in real interest rates (E43) | increase in savings (D14) |
| anticipated permanent terms of trade deterioration (F19) | decrease in savings (E21) |
| lower terms of trade (F14) | decrease in wages (J31) |
| decrease in wages (J31) | decrease in savings (E21) |
| temporary terms of trade deterioration (F14) | oscillating pattern of current account surpluses and deficits (F32) |
| Harberger-Laursen-Metzler effect (F16) | varying signs for savings responses (E21) |