INTERTEMPORAL PRICE SPECULATION AND THE OPTIMAL CURRENT-ACCOUNT DEFICIT - REPLY AND CLARIFICATION

In the model of Obstfeld (1983), a country hurt by a temporary shift i n its terms of trade, whether the shift is infinitesimal or not, alway s runs a temporary current-account deficit. Temporary rises in relativ e export prices always cause surpluses in the model. This note derives these results within an analysis that clarifies how temporary terms-o f-trade shocks affect the consumption-based real interest rate on exte rnal debt and, hence, the current account.