Shock Persistence and Current Account Dynamics

Kang Shi ()

Economics Bulletin, 2011, vol. 31, issue 3, 2260-2271

Abstract: One-sector inter-temporal models of the current account predict that a transitory shock to the terms of trade will lead to improvement in trade balance, while a persistent (or permanent) one could result in trade balance deterioration. This paper reexamines this issue in a two-sector small open economy model with non-traded goods and show that the result may not hold, depending on the exchange rate regime.

Keywords: Two-sector model; Current account; Shock persistence; Terms of trade; Exchange rate regimes. (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2011-08-09
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