search query: @author Lane, P. R. / total: 10
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Author: | Tornell, A. Lane, P. R. |
Title: | Are windfalls a curse ? A non-representative agent model of the current account |
Journal: | Journal of International Economics
1998 : FEB, VOL. 44:1, p. 83-112 |
Index terms: | MODELS CURRENT ACCOUNT GAMES POLITICAL ECONOMY |
Language: | eng |
Abstract: | A puzzling feature of temporary terms of trade booms is that some countries have responded to such windfalls by running current account deficits. Furthermore, the countries that have ran current account deficits, failed to attain greater post-boom growth rates which indicates that the deficits were invested or consumed in projects of low quality. The point made in the paper is that the structure of the fiscal process is critical in determining outcomes. If fiscal control is unitary, then the consumption-smoothing effect is operative, and representative-agent models of the current account have predictive power. However, if control is divided among several fiscal claimants, a voracity effect appears which counteracts the consumption smoothing effect, leading to a deterioration of the current account in response to a positive temporary shock. The interaction among fiscal claimants is modeled as a dynamic game and show that in equilibrium aggregate appropriation increases more than the windfall itself. This results in a deterioration of the current account. Also, it is shown that all the windfall is dissipated, with the country experiencing no increase in welfare. |
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