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Current account, productivity and terms of trade shocks in Norway

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  • C�sar R. Sobrino

Abstract

Economic theory suggests that a permanent rise in terms of trade should result in a permanent rise in the standard of living. The increase comes from a permanent rise in productivity following an efficient reallocation of resources in a frictionless economy. This article presents Norway as a counterexample using three-variable Structural Vector Moving Average (SVMA) with long-run restrictions. The results show that permanent shocks to terms of trade improve the current account and have almost no effect on the output per capita growth. An over-identification test that restricts the permanent shocks to terms of trade to have only temporary effects on output per capita growth cannot be rejected as well. Overall, those shocks that have permanent effects on terms of trade or output per capita growth do not have permanent effects on each other. The empirical evidence suggests that strong intersectoral rigidities to reallocation of resources are present in Norway.

Suggested Citation

  • C�sar R. Sobrino, 2011. "Current account, productivity and terms of trade shocks in Norway," Applied Economics Letters, Taylor & Francis Journals, vol. 18(18), pages 1745-1750, December.
    • Handle: RePEc:taf:apeclt:v:18:y:2011:i:18:p:1745-1750
    DOI: 10.1080/13504851.2011.562154
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    1. Mr. Paul Cashin & Christopher J. Kent, 2003. "The Response of the Current Account to Terms of Trade Shocks: Persistence Matters," IMF Working Papers 2003/143, International Monetary Fund.
    2. 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.
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    5. 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.
    6. Edwards, Sebastian, 1989. "Temporary Terms-of-Trade Disturbances, the Real Exchange Rate and the Current Account," Economica, London School of Economics and Political Science, vol. 56(223), pages 343-357, August.
    7. 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.
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    Cited by:

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