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World Interest Shocks, Capital, and the Current Account
Author(s) -
Fisher Walter H.,
Terrell Dek
Publication year - 2000
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00220
Subject(s) - economics , current account , shock (circulatory) , interest rate , macroeconomics , monetary economics , capital (architecture) , terms of trade , open economy , investment (military) , welfare , debt , world economy , investment function , capital accumulation , capital flows , production (economics) , exchange rate , microeconomics , market economy , medicine , history , profit (economics) , archaeology , politics , political science , law
Macroeconomic performance in many developing countries is influenced by international credit conditions. This paper considers a developing economy that faces an upward‐sloping supply function of debt. It analyzes how a particular foreign shock, a world interest shock, influences such key macroeconomic variables as output, investment, the current account, and the terms of trade in both short‐run and steady‐state equilibrium. An intertemporal optimizing model is used to study these issues. This approach permits characterization of the intertemporal adjustment of the indebted economy, and shows that a world interest shock lowers overall economic welfare.