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Terms-of-trade uncertainty and economic growth: are risk indicators significant in growth regressions?

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  • Enrique G. Mendoza

Abstract

This paper examines a neoclassical stochastic endogenous growth model in which terms-of-trade uncertainty affects savings and consumption growth. The model explains the positive link between growth and the average rate of change of terms of trade found in recent empirical studies. In addition, terms-of-trade variability, as an indicator of risk, is found to be a key determinant of growth. This implies that welfare costs of uncertainty are much larger than conventional measures of costs of consumption instability. The model's key predictions are strongly supported by results of panel regressions.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1994/491/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1994/491/ifdp491.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 491.

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Date of creation: 1994
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Handle: RePEc:fip:fedgif:491

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Keywords: Economic development ; Regression analysis;

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Cited by:
  1. Turnovsky, Stephen J. & Chattopadhyay, Pradip, 2003. "Volatility and growth in developing economies: some numerical results and empirical evidence," Journal of International Economics, Elsevier, vol. 59(2), pages 267-295, March.
  2. Athanasoulis, Stefano G. & van Wincoop, Eric, 2000. "Growth uncertainty and risksharing," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 477-505, June.
  3. Ricardo Hausmann & Michael Gavin, 1996. "Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America," IDB Publications 5919, Inter-American Development Bank.
  4. Ricardo Hausmann & Michael Gavin, 1996. "Asegurar la estabilidad y el crecimiento en una región propensa a las sacudidas: los retos de políticas para América Latina," Research Department Publications 4021, Inter-American Development Bank, Research Department.
  5. Ahmed, Abdullahi D. & Suardi, Sandy, 2009. "Macroeconomic Volatility, Trade and Financial Liberalization in Africa," World Development, Elsevier, vol. 37(10), pages 1623-1636, October.

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