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The Response of the Current Account to Terms of Trade Shocks: A Panel-data Study

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Author Info
Christopher Kent (Reserve Bank of Australia)
Abstract

This paper demonstrates that the response of the current account to shocks depends on the degree of persistence of these shocks. This result is in accordance with standard intertemporal models that incorporate both consumption smoothing and an investment response to shocks. The estimation procedure used to test this result takes advantage of the fact that the persistence of the terms of trade varies greatly across countries. Countries with the least persistent terms of trade shocks are shown to exhibit a positive relationship between these shocks and the current account; countries with the most persistent terms of trade shocks are shown to exhibit a negative relationship.

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File URL: http://www.rba.gov.au/rdp/RDP9705.pdf
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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9705.

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Date of creation: Oct 1997
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Handle: RePEc:rba:rbardp:rdp9705

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Related research
Keywords: current account; terms of trade shocks; persistence;

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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.:

  1. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The intertemporal approach to the current account," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 34, pages 1731-1799 Elsevier. [Downloadable!] (restricted)
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  3. Atish R. Ghosh & Jonathan David Ostry, 1992. "Macroeconomic Uncertainty, Precautionary Savings and the Current Account," IMF Working Papers 92/72, International Monetary Fund.
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  4. 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. [Downloadable!] (restricted)
    Other versions:
  5. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, Oxford University Press, vol. 9(2), pages 305-33, May.
  6. Pierre Danthine, Jean & Donaldson, John B., 1993. "Methodological and empirical issues in real business cycle theory," European Economic Review, Elsevier, vol. 37(1), pages 1-35, January. [Downloadable!] (restricted)
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  7. Lane, Philip R & Tornell, Aaron, 1996. " Power, Growth, and the Voracity Effect," Journal of Economic Growth, Springer, vol. 1(2), pages 213-41, June.
  8. Reuven Glick & Kenneth Rogoff, 1992. "Global versus country-specific productivity shocks and the current account," Working Papers in Applied Economic Theory 92-06, Federal Reserve Bank of San Francisco.
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  9. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January. [Downloadable!] (restricted)
  10. Kraay, Aart & Ventura, Jaume, 1995. "Trade and fluctuations," Policy Research Working Paper Series 1560, The World Bank. [Downloadable!]
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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.)

  1. Roberto Duncan, 2003. "The Harberger-Laursen-Metzler Effect Revisited: An Indirect-Utility-Function Approach," Working Papers Central Bank of Chile 250, Central Bank of Chile. [Downloadable!]
  2. Christopher J. Kent & Paul Cashin, 2003. "The Response of the Current Account to Terms of Trade Shocks: Persistence Matters," IMF Working Papers 03/143, International Monetary Fund. [Downloadable!]
  3. Chowdhury, Abdur R., 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," BOFIT Discussion Papers 3/2003, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  4. Hakan Berument & Nergiz Dinçer, 2005. "Denomination Composition of Trade and Trade Balance : Evidence from Turkey," Departmental Working Papers 0510, Bilkent University, Department of Economics. [Downloadable!]
    Other versions:
  5. Allan P. Layton & Abbas Valadkhani, 2004. "Measures of National Export Price Volatility Based on the Capital Asset Pricing Model," School of Economics and Finance Discussion Papers and Working Papers Series 171, School of Economics and Finance, Queensland University of Technology. [Downloadable!]
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