Imported Input Price, the Current Account and Macroeconomic Adjustment

Chang Mo Ahn
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Chang Mo Ahn: Gyeongsang National University

Korean Economic Review, 1996, vol. 12, issue 1, 77-99

Abstract: This paper provides an alternative possibility within an infinite-horizon optimizing framework of saving-investment and the current account by introducing a risk premium to the real cost of borrowing. The individual borrowing country faces an upward sloping supply schedule of foreign funds rather than a horizontal one in this framework. The introduction of a risk premium allows us to analyze the consumption/saving dynamics as well as production/investment dynamics simultaneously. The problem of flat consumption/saving dynamics found in the existing literature can also be avoided and more realistic adjustment pattern of saving/investment and the current account is obtained.

Date: 1996
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