Economic Booms, Trade Deficits, and Economic Policy

Universitat Pompeu Fabra Economics Working Paper No. 397

33 Pages Posted: 10 Feb 2000

See all articles by Francisco Alcalá

Francisco Alcalá

Universidad de Murcia. Facultad de Economia y Empresa

Diego Penarrubia

University of Murcia

Date Written: October 1999

Abstract

Many economic booms have been accompanied by a real exchange rate appreciation, a large trade deficit and a deteriorating traded sector, and have raised the question of the desirability of some stabilization policy. We characterize the dynamics created by an expected productivity rise in an open economy where firms have limited access to financial markets. The shock raises the real exchange rate and creates a trade deficit. We show that this can bring the traded sector into losses, and that borrowing constraints may cause an inefficiently high capacity reduction in the traded sector, as well as larger trade deficits. Several economic policy alternatives are explored.

JEL Classification: F41, F43, E62

Suggested Citation

Alcalá, Francisco and Penarrubia, Diego, Economic Booms, Trade Deficits, and Economic Policy (October 1999). Universitat Pompeu Fabra Economics Working Paper No. 397. Available at SSRN: https://ssrn.com/abstract=199052 or http://dx.doi.org/10.2139/ssrn.199052

Francisco Alcalá (Contact Author)

Universidad de Murcia. Facultad de Economia y Empresa ( email )

Campus de Espinardo
Espinardo, Murcia 30100
Spain
34-868883767 (Phone)
34-868883758 (Fax)

Diego Penarrubia

University of Murcia ( email )

Avda Teniente Flomesta, 5
Murcia, Murcia 30100
Spain

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