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

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

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.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 6 (October)
Pages: 876-896

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:6:p:876-896
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  4. Santanu Chatterjee & Stephen Turnovsky, 2005. "Foreign Aid and Economic Growth: The Role of Flexible Labor Supply," Working Papers UWEC-2004-07-P, University of Washington, Department of Economics, revised Nov 2005.
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  13. Mansoorian, Arman, 1993. "Habit persistence and the Harberger-Laursen-Metzler effect in an infinite horizon model," Journal of International Economics, Elsevier, vol. 34(1-2), pages 153-166, February.
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  19. Santanu Chatterjee & Georgios Sakoulis & Stephen Turnovsky, 2000. "Unilateral Capital Transfers, Public Investment, and Economic Growth," Discussion Papers in Economics at the University of Washington 0008, Department of Economics at the University of Washington.
  20. Carlos F. Diaz-Alejandro, 1984. "Latin American Debt: I Don't Think We Are in Kansas Anymore," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 335-403.
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  28. Turnovsky, Stephen J., 1996. "Fiscal policy, growth, and macroeconomic performance in a small open economy," Journal of International Economics, Elsevier, vol. 40(1-2), pages 41-66, February.
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