The paper investigates the optimal time path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rate. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate.

The paper investigates the optimal time path of consumption and external borrowing in the dependent economy model. The small country faces given world prices and a given world real interest rate. The presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods. The paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance. In particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate.

The model of the black market for dollars focuses on the interaction of portfolio decisions relevant to the holding of asset stocks and the determinants of net flows of dollars associated with tourism and smuggling. A partial-equilibrium model of the black market shows that the level of the premium is determined by the official real exchange rate and the official, depreciation-adjusted interest differential, as well as seasonal factors associated with tourism. Expectations of future exchange rate changes, under rational expectations, are shown to affect the current level of the black market premium. The empirical evidence provides ample support for the role of the key determinants of the premium as well as for an important seasonal pattern. The magnitude of the seasonal variation is evidence of the imperfect substitutability between black dollars and cruzeiro assets in portfolios.