Transitory Terms-of-Trade Shocks and the Current Account: The Case of Constant Time Preference

Abstract

This paper emplys a simple intertemporal optimization model to study the effects of transitory fluctuations in a small country's terms of trade. The paper's analysis centers on the currecnt-account and utility paths induced by temporary terms-of-trade movements. An infinite planning horizon is postulated so taht the long-run dynamic consequences of price disturbances may be pursued.