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Terms of trade and current account fluctuations: The Harberger-Laursen-Metzler effect revisited

  • Bouakez, Hafedh
  • Kano, Takashi

This paper investigates whether extending the intertemporal model of the current account to allow for variations in the terms of trade improves its ability to fit the data. It derives a testable present-value representation of the current account that encompasses the Harberger-Laursen-Metzler (HLM) effect, according to which a temporary rise in the terms of trade improves the current account. The present-value model is tested using data from Australia, Canada, and the United Kingdom. The results show that terms-of-trade movements do not affect the current account in a significant way, and that, in two of the three cases, the model is strongly rejected by the data.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 1 (March)
Pages: 260-281

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:260-281
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Obstfeld, Maurice & Obstfeld, Maurice, 1996. "Intertemporal Price Speculation and the Optimal Current-Account Deficit: Reply and Clarification," Center for International and Development Economics Research, Working Paper Series qt5n37z46f, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. 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.
  3. Paul Bergin & Steven Sheffrin, . "Interest Rates, Exchange Rates And Present Value Models Of The Current Account," Department of Economics 97-22, California Davis - Department of Economics.
  4. Reuven Glick & Kenneth Rogoff, 1993. "Global Versus Country-Specific Productivity Shocks and the Current Acocount," Boston University - Institute for Economic Development 31, Boston University, Institute for Economic Development.
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  9. John Y. Campbell, 1992. "Intertemporal Asset Pricing Without Consumption Data," NBER Working Papers 3989, National Bureau of Economic Research, Inc.
  10. Otto, Glenn, 1992. "Testing a present-value model of the current account: Evidence from US and Canadian time series," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 414-430, October.
  11. James M. Nason & John H. Rogers, 2003. "The present-value model of the current account has been rejected: round up the usual suspects," International Finance Discussion Papers 760, Board of Governors of the Federal Reserve System (U.S.).
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  13. Peter Wickham & Carmen Reinhart, 1994. "Commodity Prices; Cyclical Weakness or Secular Decline?," IMF Working Papers 94/7, International Monetary Fund.
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  18. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
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  22. repec:fth:harver:1435 is not listed on IDEAS
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