Advanced Search
MyIDEAS: Login to save this article or follow this journal

Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect

Contents:

Author Info

  • Sen, Partha
  • Turnovsky, Stephen J.

Abstract

This paper analyzes the effects of both a permanent and a temporary deterioration In the terms of trade on a small open economy. The model, based on intertemporal optimization, emphasizes the labor-leisure choice and the role of capital accumulation There are two main conclusions to be drawn from the analysis. The first 1s that in all cases the transitional dynamics depends critically upon the long-run response of the capital stock to the deterioration m the terms of trade. This has been shown to consist of a substitution effect, which is negative, together with an income effect, which is positive. Secondly, since the steady state equilibrium depends upon the initla1 conditions of the economy, a temporary shock, by altering these initial conditions for some later date when the shock ceases, leads to a permanent effect on the economy. In the case where the substitution effect dominates, a deterioration in the terms of trade leads to a short-run reduction in investment and a short-run current account surplus, contrary to the Laursen-Metzler effect. However, when the long-run income effect dominates, the deterioration m the terms of trade leads to a short-run investment boom, accompanied by a short-term current account deficit. The Laursen-Metzler effect prevails, although it is driven by investment, rather than by savings behavior.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6V6D-45BC66S-20/2/ae919cf12483e81ea5f4e32d615e4565
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 26 (1989)
Issue (Month): 3-4 (May)
Pages: 227-250

as in new window
Handle: RePEc:eee:inecon:v:26:y:1989:i:3-4:p:227-250

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords:

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Obstfeld, Maurice, 1983. "Intertemporal price speculation and the optimal current-account deficit," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 135-145, August.
  2. Andrew B. Abel & Olivier J. Blanchard, 1982. "An Intertemporal Model of Saving and Investment," NBER Working Papers 0885, National Bureau of Economic Research, Inc.
  3. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 251-70, May.
  4. Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
  5. Torsten Persson & Lars E.O. Svensson, 1983. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," NBER Working Papers 1129, National Bureau of Economic Research, Inc.
  6. Matsuyama, Kiminori, 1988. "Terms-of-Trade, Factor Intensities and the Current Account in a Life-Cycle Model," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 247-62, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:26:y:1989:i:3-4:p:227-250. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.