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Dynamic effects of terms of trade shocks: The impact on debt and growth

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  • Eicher, Theo S.
  • Schubert, Stefan F.
  • Turnovsky, Stephen J.

Abstract

By specifying borrowing costs to increase with the debt to equity ratio we generate procyclical debt flows in response to terms of trade shocks, consistent with empirical evidence. Since procyclical capital flows attract unsustainably large capital inflows during favorable shocks and force countries to overadjust to adverse shocks, we obtain nonlinear adjustments, involving possible overshooting of the long-run debt level. By linking growth, procyclical debt, and terms of trade shocks, we add a distinctly dynamic component to the "Harberger-Laursen-Metzler effect". We also examine the welfare implications of the terms of trade shocks and find substantial impact of even intermediate sized shocks.

Suggested Citation

  • Eicher, Theo S. & Schubert, Stefan F. & Turnovsky, Stephen J., 2008. "Dynamic effects of terms of trade shocks: The impact on debt and growth," Journal of International Money and Finance, Elsevier, vol. 27(6), pages 876-896, October.
  • Handle: RePEc:eee:jimfin:v:27:y:2008:i:6:p:876-896
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    Cited by:

    1. Mykhaylova Olena & Staveley-O’Carroll James, 2014. "International transmission of productivity shocks with nonzero net foreign debt," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-46, January.
    2. Rasmané OUEDRAOGO & Jean-Louis COMBES, 2014. "How does external debt impact democratization? Evidence from developing countries," Working Papers 201408, CERDI.
    3. Heer, Burkhard & Schubert, Stefan Franz, 2012. "Unemployment and debt dynamics in a highly indebted small open economy," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1392-1413.
    4. repec:sos:sosjrn:170411 is not listed on IDEAS
    5. James Staveley-O'Carroll & Olena M. Staveley-O'Carroll, 2016. "Exchange Rate Targeting in the Presence of Foreign Debt Obligations," Working Papers 1604, College of the Holy Cross, Department of Economics.
    6. Chung, Keunsuk & Turnovsky, Stephen J., 2010. "Foreign debt supply in an imperfect international capital market: Theory and evidence," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 201-223, March.
    7. repec:ris:betajl:0010 is not listed on IDEAS
    8. José Luis Nolazco & Patricia Lengua-Lafosse & Nikita Céspedes, 2016. "Contribución de los choques externos en el crecimiento económico del Perú: un modelo semi-estructural," Working Papers 2016-80, Peruvian Economic Association.
    9. Chen Fang & Po-Sheng Lin, 2013. "Traded Bond Denominations, Shock Persistence and Current Account Dynamics: Another Look at the Harberger–Laursen–Metzler Effect," Pacific Economic Review, Wiley Blackwell, vol. 18(4), pages 502-529, October.
    10. 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, vol. 13(38), pages 129-146, December.
    11. SENBETA, Sisay Regassa, 2011. "A small open economy new Keynesian DSGE model for a foreign exchange constrained economy," Working Papers 2011004, University of Antwerp, Faculty of Applied Economics.
    12. Audrey Sallenave, 2010. "Real exchange rate misalignments and economic performance for the G20 countries," EconomiX Working Papers 2010-1, University of Paris Nanterre, EconomiX.
    13. Pedro de Mendonça, 2013. "Nonlinear Phenomena in a Growing Economy with Convex Adjustment Costs," EERI Research Paper Series EERI RP 2013/05, Economics and Econometrics Research Institute (EERI), Brussels.
    14. repec:eee:reveco:v:50:y:2017:i:c:p:245-260 is not listed on IDEAS

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