Intertemporal price speculation and the optimal current-account deficit: a comment

Abstract

This note shows that contrary to the result of an unambiguous current account deterioration due to a transitory terms of trade deterioration obtained by Obstfeld (1983), his model, in general, implies an ambiguous current account response. The note demonstrates that three conditions which are individually sufficient for a current deficit to emerge in response to this transitory price shock are (i) an intertemporal elasticity of substitution exceeding unity, (ii) a non-positive initial asset position, and (iii) no domestic consumption of the exportable. The analysis reveals that Obstfeld's result remains valid if the focus is on the trade account but needs to be qualified if applied to the current account.