This paper studies how nontraded goods limit the ability of a country to finance current account deficits. It uses an intertemporal model of the current account for a small open economy where goods are endogenously nontraded due to explicit trade costs. The economy has an endowment of two goods...

The paper considers the effect of a nominal exchange rate devaluation on the current account, using an intertemporal model that highlights the interaction between leisure and consumption. An analytical solution demonstrates that household behavior may differ markedly from the simple consumption...