Intertemporal Price Speculation and the Optimal Current-Account Deficit: Reply and Clarification
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In the model of Obstfeld (1983), a country hurt by a temporary shift in its terms of trade,
whether the shift is infinitesimal or not, always runs a temporary current-account deficit.
Temporary rises in relative export prices always cause surpluses in the model. This note
derives these results within an analysis that clarifies how temporary terms-of-trade shocks
affect the consumption-based real interest rate on external debt and, hence, the current
account.