Dynamic equilibrium adjustments to a terms of trade disturbance

Abstract

This paper investigates how a fall in the price of imports will have dynamic effects in an open economy. We analyse the effects within an aggregated intertemporal equilibrium model with internationally mobile capital. We assume the domestic product to be an imperfect substitute for a foreign product. Hence, the model is characterized by an endogenous domestic product price and a path dependent steady state solution. Using a numerical model calibrated to the Norwegian economy we study the effects of both anticipated and unanticipated changes in the import price.