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Intertemporal Substitution and Terms-of-Trade Shocks

  • Paul Cashin
  • C. John McDermott

The paper examines the relationship between transitory terms-of-trade shocks and private saving. Using a model allowing for nonseparability between the consumption of tradables and nontradables, the paper estimates the intertemporal elasticity of substitution while accounting for the intratemporal elasticity of substitution between the consumption of tradables and nontradables. Empirical analysis of data for five industrial countries indicates that in response to transitory terms-of-trade shocks, intertemporal substitution of consumption and intratemporal substitution of consumption between tradables and nontradables both have large effects on private saving. Copyright Blackwell Publishing Ltd 2003.

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Article provided by Wiley Blackwell in its journal Review of International Economics.

Volume (Year): 11 (2003)
Issue (Month): 4 (09)
Pages: 604-618

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Handle: RePEc:bla:reviec:v:11:y:2003:i:4:p:604-618
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  1. Rudiger Dornbusch, 1981. "Real Interest Rates, Home Goods, and Optimal External Borrowing," NBER Working Papers 0779, National Bureau of Economic Research, Inc.
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  12. Mohsin S. Khan & Malcolm D. Knight, 1983. "Determinants of Current Account Balances of Non-Oil Developing Countries in the 1970s: An Empirical Analysis (Analyse empirique des facteurs déterminant le solde des transactions courantes des pays e," IMF Staff Papers, Palgrave Macmillan, vol. 30(4), pages 819-842, December.
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  17. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
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