This paper investigates whether extending the intertemporal model of the current account to allow for variations in the terms of trade improves its ability to fit the data. It derives a testable present-value representation of the current account that encompasses the Harberger-Laursen-Metzler (HLM) effect, according to which a temporary rise in the terms of trade improves the current account. The present-value model is tested using data from Australia, Canada, and the United Kingdom. The results show that terms-of-trade movements do not affect the current account in a significant way, and that, in two of the three cases, the model is strongly rejected by the data.
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Volume (Year): 30 (2008) Issue (Month): 1 (March) Pages: 260-281 Download reference. The following formats are available: HTML
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