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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. James M. Nason and John H. Rogers, 2001. "The Present Value Model of the Current Account Has Been Rejected: Round Up the Usual Subjects," Computing in Economics and Finance 2001 102, Society for Computational Economics.
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  17. repec:fth:harver:1435 is not listed on IDEAS
  18. Jeffrey D. Sachs, 1981. "The Current Account and macroeconomic Adjustment in the 1970s," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 12(1), pages 201-282.
  19. Sheffrin, S.M. & Woo, W.T., 1989. "Present Value Tests Of An Intertemporal Model Of The Current Account," Papers 61, California Davis - Institute of Governmental Affairs.
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