METU Department of Economics Seminar Series (Nov 14th)
MIDDLE EAST TECHNICAL UNIVERSITY
Department of Economics Seminar Series
(Izmir University of Economics)
Date: November 14, 2022 (Monday)
Synchronous Online Seminar
Meeting ID: 962 6861 4522
The purpose of this paper is to determine the central determinants of current account deficit of a small open economy in which non-renewable resource is an essential factor of production. To this end, we exploit a two-period small open economy framework, cf. Obstfeld and Rogoff (1996), and show that the subjective rate of discount and the world real interest rate are two central determinants of current account dynamics, irrespective of whether the economy is resource-abundant or resource-scarce, under logarithmic preference assumption. We show that such an economy will incur a current account deficit if the subjective rate of discount is sufficiently high and/ or the world real interest rate is sufficiently low. We also show that a policymaker can reduce the current account deficit by making consumption, rather than the non-renewable, expensive, via taxation. This finding reminds us once again that the current account deficit is mainly a result of domestic demand exceeding domestic production, and not whether an economy is endowed with non-renewable resources.