Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Response of the Current Account to Terms of Trade Shocks

Contents:

Author Info

  • Paul Cashin
  • Christopher J. Kent

Abstract

Is the relationship between the current account balance and the terms of trade affected by the persistence of terms of trade shocks? In intertemporal models of the current account that incorporate a consumption-smoothing and an investment response to shocks, the effect of the terms of trade on external balances is predicted to be dependent on the duration of terms of trade shocks. Using a median-unbiased estimator, an unbiased model-selection rule, and terms of trade data for 128 countries over the period 1960-99 we identify two groups of countries-those that typically experience temporary terms of trade shocks and those that typically experience permanent terms of trade shocks. The results from panel-data regressions of the two groups of countries support the theoretical predictions of the intertemporal approach to the current account. We find that the greater (lesser) the persistence of the terms of trade shock, the more (less) the investment effect dominates the consumption-smoothing effect on saving, so that the current account balance moves in the opposite (same) direction as that of the shock.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. 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.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16629
Download Restriction: no

Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/143.

as in new window
Length: 48
Date of creation: 01 Jul 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/143

Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Email:
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords:

References

References listed on IDEAS
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.:
as in new window
  1. Reuven Glick & Kenneth Rogoff, 1992. "Global Versus Country-Specific Productivity Shocks and the Current Account," NBER Working Papers 4140, National Bureau of Economic Research, Inc.
  2. Hussein, Khaled A. & de Mello, Luiz Jr., 1999. "International capital mobility in developing countries: theory and evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(3), pages 367-381.
  3. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
  4. Christopher Kent, 1997. "The Response of the Current Account to Terms of Trade Shocks: A Panel-data Study," RBA Research Discussion Papers, Reserve Bank of Australia rdp9705, Reserve Bank of Australia.
  5. Basu, Parantap & McLeod, Darryl, 1991. "Terms of trade fluctuations and economic growth in developing economies," Journal of Development Economics, Elsevier, Elsevier, vol. 37(1-2), pages 89-110, November.
  6. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(2), pages 251-70, May.
  7. Edwards, Sebastian, 1989. "Temporary Terms-of-Trade Disturbances, the Real Exchange Rate and the Current Account," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 56(223), pages 343-57, August.
  8. Rudiger Dornbusch, 1981. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
  9. DeJong, David N, et al, 1992. "Integration versus Trend Stationarity in Time Series," Econometrica, Econometric Society, Econometric Society, vol. 60(2), pages 423-33, March.
  10. International Monetary Fund, 1999. "Macroeconomic and Sectoral Effects of Terms-Of-Trade Shocks," IMF Working Papers 99/134, International Monetary Fund.
  11. Iscan, Talan B., 2000. "The terms of trade, productivity growth and the current account," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(3), pages 587-611, June.
  12. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks," IMF Working Papers 91/100, International Monetary Fund.
  13. Haque, Nadeem U. & Montiel, Peter, 1991. "Capital mobility in developing countries: Some empirical tests," World Development, Elsevier, Elsevier, vol. 19(10), pages 1391-1398, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Nickel, Christiane & Vansteenkiste, Isabel, 2008. "Fiscal policies, the current account and Ricardian equivalence," Working Paper Series, European Central Bank 0935, European Central Bank.
  2. Diego Bastourre & Jorge Carrera & Javier Ibarlucia, 2008. "Commodity Prices in Argentina: What Moves the Wind?," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, Central Bank of Argentina, Economic Research Department, vol. 1(51), pages 43-81, April - S.
  3. Diego N. Moccero, 2008. "The intertemporal approach to the current account: Evidence for Argentina," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 327-353, November.
  4. Paul Cashin & Samya Beidas-Strom, 2011. "Are Middle Eastern Current Account Imbalances Excessive?," IMF Working Papers 11/195, International Monetary Fund.
  5. Narayan, Seema, 2013. "A structural VAR model of the Fiji Islands," Economic Modelling, Elsevier, Elsevier, vol. 31(C), pages 238-244.
  6. Christian Gillitzer & Jonathan Kearns, 2005. "Long-term Patterns in Australia’s Terms of Trade," RBA Research Discussion Papers, Reserve Bank of Australia rdp2005-01, Reserve Bank of Australia.
  7. Graciela L Kaminsky, 2010. "Terms of Trade Shocks and Fiscal Cycles," RBA Annual Conference Volume, Reserve Bank of Australia, in: Renée Fry & Callum Jones & Christopher Kent (ed.), Inflation in an Era of Relative Price Shocks Reserve Bank of Australia.
  8. Gonzalo Hernández, 2011. "Terms of Trade and Output Fluctuations in Colombia," UMASS Amherst Economics Working Papers, University of Massachusetts Amherst, Department of Economics 2011-04, University of Massachusetts Amherst, Department of Economics.
  9. Piotr Misztal, 2010. "The Harberger-Laursen-Metzler Effect. Theory and Practice in Poland," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 13(38), pages 129-146, December.
  10. Tarlok Singh, 2007. "Intertemporal Optimizing Models Of Trade And Current Account Balance: A Survey," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 21(1), pages 25-64, 02.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:03/143. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.