IDEAS home Printed from https://ideas.repec.org/a/lje/journl/v17y2012i2p87-110.html
   My bibliography  Save this article

The Harberger-Laursen-Metzler Effect: Evidence from Pakistan

Author

Listed:
  • Tayyaba Idrees

    (MPhil Student, Department of Economics, Fatima Jinnah Women University, Pakistan.)

  • Saira Tufail

    (Lecturer in Economics, Department of Economics, Fatima Jinnah Women University, Pakistan.)

Abstract

According to the Harberger-Laursen-Metzler (HLM) effect, an exogenous temporary increase in the terms of trade leads to an improvement in the current account balance. This paper uses a recursive vector autoregression to investigate empirically the existence of the HLM effect in Pakistan, using a time series dataset for the period 1980–2009. Two important results emerge. First, real income deteriorates with an improvement in the terms of trade. Second, the current account balance also responds negatively to innovations in the terms of trade, which implies that the HLM effect does not exist in Pakistan.

Suggested Citation

  • Tayyaba Idrees & Saira Tufail, 2012. "The Harberger-Laursen-Metzler Effect: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(2), pages 87-110, July-Dec.
    • Handle: RePEc:lje:journl:v:17:y:2012:i:2:p:87-110
    as

    Download full text from publisher

    File URL: http://121.52.153.179/JOURNAL/LJE%20Vol%2017-2%20Final%20121712/04%20Tayyaba%20.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Aaron Tornell & Philip Lane, 1994. "Are Windfalls a Curse? A Non-Representative Agent Model of the Current Account and Fiscal Policy," NBER Working Papers 4839, National Bureau of Economic Research, Inc.
    2. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-137, February.
    3. Mr. Hamid Faruqee & Guy Debelle, 1996. "What Determines the Current Account? a Cross-Sectional and Panel Approach," IMF Working Papers 1996/058, International Monetary Fund.
    4. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
    5. Paul Cashin & C. John McCDermott, 2002. "The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability," IMF Staff Papers, Palgrave Macmillan, vol. 49(2), pages 1-2.
    6. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
    7. Serven, Luis, 1995. "Capital goods imports, the real exchange rate and the current account," Journal of International Economics, Elsevier, vol. 39(1-2), pages 79-101, August.
    8. Agenor, Pierre-Richard & Aizenman, Joshua, 2004. "Savings and the terms of trade under borrowing constraints," Journal of International Economics, Elsevier, vol. 63(2), pages 321-340, July.
    9. Sen, Partha & Turnovsky, Stephen J., 1989. "Deterioration of the terms of trade and capital accumulation: A re-examination of the Laursen-Metzler effect," Journal of International Economics, Elsevier, vol. 26(3-4), pages 227-250, May.
    10. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799, Elsevier.
    11. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 97(2), pages 251-270.
    12. Otto, G., 2003. "Terms of trade shocks and the balance of trade: there is a Harberger-Laursen-Metzler effect," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 155-184, April.
    13. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
    14. Ashfaque H. Khan & Lubna Hasan & Afia Malik, 1992. "Dependency Ratio, Foreign Capital Inflows and the Rate of Savings in Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 31(4), pages 843-856.
    15. Robinson, James A. & Torvik, Ragnar, 2005. "White elephants," Journal of Public Economics, Elsevier, vol. 89(2-3), pages 197-210, February.
    16. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    17. Fry, Maxwell J., 1986. "Terms-of-trade dynamics in Asia: An analysis of national saving and domestic investment responses to terms-of-trade changes in 14 Asian LDCs," Journal of International Money and Finance, Elsevier, vol. 5(1), pages 57-73, March.
    18. Broda, Christian, 2004. "Terms of trade and exchange rate regimes in developing countries," Journal of International Economics, Elsevier, vol. 63(1), pages 31-58, May.
    19. Bouakez, Hafedh & Kano, Takashi, 2008. "Terms of trade and current account fluctuations: The Harberger-Laursen-Metzler effect revisited," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 260-281, March.
    20. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
    21. Piotr Misztal, 2010. "The Harberger-Laursen-Metzler Effect. Theory and Practice in Poland," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 13(38), pages 129-146, December.
    22. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
    23. Persson, Torsten & Svensson, Lars E O, 1985. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 43-65, February.
    24. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
    25. Pinto, Brian, 1987. "Nigeria during and after the Oil Boom: A Policy Comparison with Indonesia," The World Bank Economic Review, World Bank, vol. 1(3), pages 419-445, May.
    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


    Cited by:

    1. Talat Afza & Khalid Ahmed & Muhammad Shahbaz, 2016. "Does Harberger–Laursen–Metzler (HLM) Exist in Pakistan? Cointegration, Causality and Forecast Error Variance Decomposition Tests," Global Business Review, International Management Institute, vol. 17(4), pages 759-778, August.
    2. Rizwana YASMEEN* & Muhammad HAFEEZ** & Ihtsham ul Haq PADDA***, 2018. "TRADE BALANCE AND TERMS OF TRADE RELATIONSHIP: Evidence from Pakistan," Pakistan Journal of Applied Economics, Applied Economics Research Centre, vol. 28(2), pages 173-188.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chen Fang & Po-Sheng Lin, 2013. "Traded Bond Denominations, Shock Persistence and Current Account Dynamics: Another Look at the Harberger–Laursen–Metzler Effect," Pacific Economic Review, Wiley Blackwell, vol. 18(4), pages 502-529, October.
    2. Muhammad Shafiullah & Faridul Islam & Ravinthirakumaran Navaratnam, 2020. "The Harberger–Laursen–Metzler effect: evidence from five SAARC countries," Empirical Economics, Springer, vol. 58(4), pages 1749-1777, April.
    3. Roberto Duncan, 2003. "The Harberger-Laursen-Metzler Effect Revisited: An Indirect-Utility-Function Approach," Working Papers Central Bank of Chile 250, Central Bank of Chile.
    4. Piotr Misztal, 2010. "The Harberger-Laursen-Metzler Effect. Theory and Practice in Poland," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 13(38), pages 129-146, December.
    5. Manuchehr Irandoust, 2017. "Saving behaviour under terms-of-trade uncertainty: evidence from hidden cointegration approach," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 10(2), pages 135-150, May.
    6. Hossain, Ferdaus, 1995. "Current account determination in the intertemporal framework: an empirical analysis," ISU General Staff Papers 1995010108000011939, Iowa State University, Department of Economics.
    7. Luis N. Lanteri, 2015. "Efecto Harberger-Laursen-Metzler. Evidencia para Argentina (1986-2014)," Economic Analysis Working Papers (2002-2010). Atlantic Review of Economics (2011-2016), Colexio de Economistas de A Coruña, Spain and Fundación Una Galicia Moderna, vol. 1, pages 1-1, December.
    8. Adler, Gustavo & Magud, Nicolas E. & Werner, Alejandro, 2018. "Terms-of-trade cycles and external adjustment," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 103-122.
    9. Alan V. Deardorff, 2016. "What Do We (and Others) Mean by "The Terms of Trade"?," Working Papers 651, Research Seminar in International Economics, University of Michigan.
    10. Otto, G., 2003. "Terms of trade shocks and the balance of trade: there is a Harberger-Laursen-Metzler effect," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 155-184, April.
    11. Aleksander Aristovnik & Stanka Setnikar-Cankar, 2006. "How Excessive are External Imbalances in Selected Transition Countries?," Prague Economic Papers, Prague University of Economics and Business, vol. 2006(3), pages 243-267.
    12. Aristovnik, Aleksander, 2006. "The Determinants & Excessiveness of Current Account Deficits in Eastern Europe & the Former Soviet Union," MPRA Paper 483, University Library of Munich, Germany.
    13. Chowdhury, Abdur, 2015. "Terms of trade shocks and private savings in the developing countries," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 1122-1134.
    14. Serven, Luis, 1999. "Terms-of-trade shocks and optimal investment: another look at the Laursen-Metzler effect," Journal of International Money and Finance, Elsevier, vol. 18(3), pages 337-365.
    15. Araujo, Juliana D. & Li, Bin Grace & Poplawski-Ribeiro, Marcos & Zanna, Luis-Felipe, 2016. "Current account norms in natural resource rich and capital scarce economies," Journal of Development Economics, Elsevier, vol. 120(C), pages 144-156.
    16. International Monetary Fund, 1999. "Macroeconomic and Sectoral Effects of Terms-of-Trade Shocks: The Experience of the Oil-Exporting Developing Countries," IMF Working Papers 1999/134, International Monetary Fund.
    17. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 21(1), pages 25-64, February.
    18. Huang, Kevin X.D. & Meng, Qinglai, 2007. "The Harberger-Laursen-Metzler effect under capital market imperfections," Journal of International Money and Finance, Elsevier, vol. 26(6), pages 1001-1015, October.
    19. Alan V. DEARDORFF, 2016. "What Do We (and Others) Mean by “The Terms of Trade”?," Turkish Economic Review, KSP Journals, vol. 3(2), pages 281-291, June.
    20. Liu, Zheng & Spiegel, Mark M. & Tai, Andrew, 2017. "Measuring the effects of dollar appreciation on Asia: A FAVAR approach," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 353-370.

    More about this item

    Keywords

    Terms of trade; current account; economic growth; recursive VAR; Pakistan;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:lje:journl:v:17:y:2012:i:2:p:87-110. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Shahid Salahuddin (email available below). General contact details of provider: https://edirc.repec.org/data/lsecopk.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.