Intermediate Imports, the Terms of Trade, and the Dynamics of the Exchange Rate and Current Account

Maurice Obstfeld

No 540, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the macroeconomic effects of an increase in the price of an imported intermediate production input. The framework of the analysis is a small open economy with abating exchange rate and endogenous terms if trade, in which saving depends on residents'(variable) rate of time preference. Contrary to popular conceptions, an intermediate price shock may lead to an appreciation of the exchange rate in both the short run and the long run, and is likely to occasion a current-account surplus. The terms of trade between foreign and domestic finished goods always improve in the long run.

Date: 1980-09
Note: ITI IFM
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Citations: View citations in EconPapers (19)

Published as Obstfeld, Maurice. "Intermediate Imports, the Terms of Trade, and the Dynamics of the Exchange Rate and Current Account." Journal of International Economics, Vol. 10, No. 4, (November 1980), pp. 461-480.

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