World Interest Shocks, Capital, and the Current Account

Walter Fisher and Dek Terrell

Review of International Economics, 2000, vol. 8, issue 2, 261-274

Abstract: Macroeconomic performance in many developing countries is influenced by international credit conditions. This paper considers a developing economy that faces an upward‐sloping supply function of debt. It analyzes how a particular foreign shock, a world interest shock, influences such key macroeconomic variables as output, investment, the current account, and the terms of trade in both short‐run and steady‐state equilibrium. An intertemporal optimizing model is used to study these issues. This approach permits characterization of the intertemporal adjustment of the indebted economy, and shows that a world interest shock lowers overall economic welfare.

Date: 2000
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