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The Terms of Trade, Productivity Shocks, and The Current Account

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  • Talan B. Iscan

    ()
    (Department of Economics, Dalhousie University)

Abstract

This paper extends the analytical framework provided by Glick and Rogoff (JME 1995) to an economy with traded and nontraded goods, and it analyzes the impact of country- specific and global productivity shocks on the current account and investment. Each of these disturbances have different implications for the current account and investment that are largely consistent with the empirical results. First, the current account responds by more than investment to country-specific traded productivity growth. Second, global traded productivity and country-specific nontraded productivity growth have no effect on the current account, but they have significant impact on investment. Third, global component of nontraded productivity is negligible and has no significant impact on either the current account or investment. In addition, the response of the current account and investment to relative prices (the terms of trade and exchange rate) are insignificant. This paper also discusses the potential reasons for it.

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File URL: http://www.economics.dal.ca/RePEc/dal/wparch/global.pdf
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File URL: http://www.economics.dal.ca/RePEc/dal/wparch/global.ps
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Bibliographic Info

Paper provided by Dalhousie, Department of Economics in its series Department of Economics at Dalhousie University working papers archive with number global.

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Length: 31 pages
Date of creation: 19 May 1998
Date of revision:
Handle: RePEc:dal:wparch:global

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Keywords: Current account; productivity; terms of trade; investment; tradables; nontradables;

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  1. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  2. Reuven Glick & Kenneth Rogoff, 1993. "Global Versus Country-Specific Productivity Shocks and the Current Acocount," Boston University - Institute for Economic Development 31, Boston University, Institute for Economic Development.
  3. 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 101-37, February.
  4. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, vol. 29(3-4), pages 237-253, November.
  5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  6. Tesar, Linda L., 1993. "International risk-sharing and non-traded goods," Journal of International Economics, Elsevier, vol. 35(1-2), pages 69-89, August.
  7. Donald Robertson & James Symons, 1991. "Some Strange Properties of Panel Data Estimators," CEP Discussion Papers dp0044, Centre for Economic Performance, LSE.
  8. Abel, Andrew B & Blanchard, Olivier J, 1986. "The Present Value of Profits and Cyclical Movements in Investment," Econometrica, Econometric Society, vol. 54(2), pages 249-73, March.
  9. Jonathan David Ostry & Atish R. Ghosh, 1992. "Macroeconomic Uncertainty, Precautionary Savings and the Current Account," IMF Working Papers 92/72, International Monetary Fund.
  10. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  11. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
  12. Gavin, Michael, 1990. "Structural adjustment to a terms of trade disturbance : The role of relative prices," Journal of International Economics, Elsevier, vol. 28(3-4), pages 217-243, May.
  13. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
  14. Brock, Philip L., 1988. "Investment, the current account, and the relative price of non-traded goods in a small open economy," Journal of International Economics, Elsevier, vol. 24(3-4), pages 235-253, May.
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