World Interest Shocks, Capital, and the Current Account
Walter Fisher and
Review of International Economics, 2000, vol. 8, issue 2, 261-74
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. Copyright 2000 by Blackwell Publishing Ltd.
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