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Terms-of-trade uncertainty and economic growth: are risk indicators significant in growth regressions?

  • Enrique G. Mendoza

This paper examines a neoclassical stochastic endogenous growth model in which terms-of-trade uncertainty affects savings and consumption growth. The model explains the positive link between growth and the average rate of change of terms of trade found in recent empirical studies. In addition, terms-of-trade variability, as an indicator of risk, is found to be a key determinant of growth. This implies that welfare costs of uncertainty are much larger than conventional measures of costs of consumption instability. The model's key predictions are strongly supported by results of panel regressions.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 491.

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Date of creation: 1994
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Handle: RePEc:fip:fedgif:491
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