Economic Booms, Trade Deficits, and Economic Policy

Abstract

Many economic booms have been accompanied by real exchange rate appreciations, large trade defcits -which have sometimes persisted after the return to the initial exchange rate parity- and a deteriorating traded sector. Those circumstances have typically raised the question of the de-sirability of some stabilization policy. We show that the dynamics induced by an expected productivity shock in an economy where the capital stock is non-mobile across sectors, match those circumstances. Furthermore, we obtain that credit market imperfections tend to exacerbate trade deficits, and to cause an inefficient capacity reduction in the traded sector. Some stabilization policies are explored.