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Savings and the terms of trade under borrowing constraints

  • Agenor, Pierre-Richard
  • Aizenman, Joshua

The authors examine the extent to which permanent terms-of-trade shocks have an asymmetric effect on private savings. Using a simple three-period model, they show that if households expect to face binding constraints on borrowing in bad states of nature (when the economy is in a long trough rather than a sharp peak). Savings rates will respond asymmetrically to favorable movements in the permanent component of the terms of trade - in contrast with the predictions of conventional consumption-smoothing models. They test the asymmetric effects of terms-of-trade disturbances using an econometric model that controls for various standard determinants of private savings. The results - based on panel data for non-oil commodity exporters of Sub-Saharan Africa for 1980-96 (a group of countries for which movements in the terms of trade have traditionally represented a key source of macroeconomic shocks) - indicate that increases in the permanent component of the terms of trade (measured using three alternative filtering techniques) indeed tend to be associated with higher rates of private savings.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 63 (2004)
Issue (Month): 2 (July)
Pages: 321-340

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Handle: RePEc:eee:inecon:v:63:y:2004:i:2:p:321-340
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