This paper examines the response of the current account in a small open economy to a permanent change in the price of imported intermediate goods. To do so, it extends Blanchard's (1985) open economy model to incorporate the capital stock with adjustment costs à la Hayashi (1982). A price increase in imported intermediate goods can be viewed as a combination of transfer payments abroad and capital taxation. The former effect leads to a current account deficit and the latter leads to a current account surplus. The overall effect depends on the relative magnitude of these effects.
ASJC Scopus subject areas
- Economics and Econometrics