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Abstract

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.

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