This paper extends Svensson and Razin's two period analysis of the Laursen-Harberger-Metzler effect to the important case where labour supply and output are variable. A terms of trade shift alters the relationship between the product and the consumption wage and so induces a change in output. This extension substantially enriches their analysis. A temporary current terms of trade deterioration has an ambiguous effect on the current account, but their finding that a future deterioration leads to an improvement in the current account is strengthened. The effect of a permanent terms of trade shift in a stationary state depends not only on the rate of time preference, but also on the strength of intertemporal substitution effects. In the canonical case of a constant rate of time preference the current account deteriorates in response to a permanent terms of trade deterioration if the degree of intertemporal substitution in consumption exceeds that in leisure, or equivalently whether the wealth effect on consumption exceeds that on labour supply. The model is then extended to an infinite horizon by embedding it in an overlapping generations framework. Intergenerational linkages through the labour market are now the source of some complex dynamics. From an initial position of balance on current account an anticipated temporary terms of trade deterioration leads to a period of steadily increasing surplus a deficit on impact, and a further period of declining surpluses. A permanent deterioration in the terms of trade leads to a similar period of anticipatory surpluses, followed by a period of declining deficits after impact.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. 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.
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.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
22.
Cited by: (explanations, 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.)