A Model of Endogenous Nontradability and its Implications for the Current Account

16 Pages Posted: 22 Oct 2007

See all articles by Paul R. Bergin

Paul R. Bergin

University of California, Davis - Department of Economics; National Bureau of Economic Research (NBER)

Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies

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Abstract

This paper studies how nontraded goods limit the ability of a country to finance current account deficits. It uses an intertemporal model of the current account for a small open economy where goods are endogenously nontraded due to explicit trade costs. The economy has an endowment of two goods with differing trade costs, either of which can be traded or nontraded in equilibrium. The model implies that current account deficits impose a cost, in the form of raising the effective interest rate in the country. The findings differ from some recent studies: first, in that the interest rate rises even for countries with modest current account deficits; secondly, the interest rate cost eventually reaches an upper bound as current account deficits grow, and progressively more nontraded goods become traded to service the debt. Panel regression analysis of interest rate and current account data is consistent with our conclusions.

Suggested Citation

Bergin, Paul R. and Glick, Reuven, A Model of Endogenous Nontradability and its Implications for the Current Account. Review of International Economics, Vol. 15, No. 5, pp. 916-931, November 2007. Available at SSRN: https://ssrn.com/abstract=1023242 or http://dx.doi.org/10.1111/j.1467-9396.2007.00662.x

Paul R. Bergin (Contact Author)

University of California, Davis - Department of Economics ( email )

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Reuven Glick

Federal Reserve Bank of San Francisco - Center for Pacific Basin Monetary & Economic Studies ( email )

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