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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

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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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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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Related research
Keywords: Economic development ; Regression analysis;

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  1. Ricardo Hausmann & Michael Gavin, 1996. "Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America," RES Working Papers 4020, Inter-American Development Bank, Research Department. [Downloadable!]
  2. Stephen Turnovsky & Pradip Chattopadhyay, 1998. "Volatility and Growth in Developing Economies: Some Numerical Results and Empirical Evidence," Working Papers 0055, University of Washington, Department of Economics. [Downloadable!]
    Other versions:
  3. Stefano Athanasoulis & Eric van Wincoop, 1997. "Growth uncertainty and risksharing," Staff Reports 30, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  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," RES Working Papers 4021, Inter-American Development Bank, Research Department. [Downloadable!]
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