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Four Decades of Terms-of-Trade Booms; Saving-Investment Patterns and a New Metric of Income Windfall

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  • Gustavo Adler
  • Nicolas E Magud

Abstract

We study the history of terms-of-trade booms (during 1970–2012), with a focus on Latin America, through the prisms of a simple metric that quantifies the associated income windfall. We also document saving patterns during these episodes and propose a measure of how much of the income windfall was saved. We find that Latin America‘s terms-of-trade shocks of the last decade have not differed much in magnitude from those observed during the 1970s, but that the associated windfall have been substantially larger. While aggregate saving increased more than in past episodes, the share of the windfall saved (the marginal saving rate) seems to be lower, suggesting that greater aggregate saving reflects mainly the sheer size of the windfall rather than a greater 'effort' to save it. Finally, we find evidence that, while savings during the boom help to increase post-boom income, the composition of such savings matters. Specifically, in past episodes, savings allocated to foreign asset accumulation appear to have contributed more to post-boom income than those devoted to domestic investment.

Suggested Citation

  • Gustavo Adler & Nicolas E Magud, 2013. "Four Decades of Terms-of-Trade Booms; Saving-Investment Patterns and a New Metric of Income Windfall," IMF Working Papers 13/103, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/103
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    References listed on IDEAS

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    1. Kohli, Ulrich, 2004. "Real GDP, real domestic income, and terms-of-trade changes," Journal of International Economics, Elsevier, vol. 62(1), pages 83-106, January.
    2. Sebastian Sosa & Gustavo Adler, 2011. "Commodity Price Cycles; The Perils of Mismanaging the Boom," IMF Working Papers 11/283, International Monetary Fund.
    3. Gustavo Adler & Sebastian Sosa, 2013. "External Conditions and Debt Sustainability in Latin America," IMF Working Papers 13/27, International Monetary Fund.
    4. Ethan Ilzetzki & Carmen M. Reinhart & Kenneth S. Rogoff, 2017. "Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?," NBER Working Papers 23134, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Trofimov, Ivan D., 2018. "Income terms of trade and economic convergence: Evidence from Latin America," MPRA Paper 87598, University Library of Munich, Germany.
    2. Cordella, Tito & Gupta, Poonam, 2015. "What makes a currency procyclical? An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 240-259.
    3. Augusto de la Torre & Federico Filippini & Alain Ize, "undated". "The Commodity Cycle in Latin America," World Bank Other Operational Studies 24014, The World Bank.
    4. Chowdhury, Abdur, 2015. "Terms of trade shocks and private savings in the developing countries," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 1122-1134.
    5. Francesco Grigoli & Alexander Herman & Klaus Schmidt-Hebbel, 2015. "Saving in Latin America and the Caribbean; Performance and Policies," IMF Working Papers 15/108, International Monetary Fund.
    6. Bertrand Gruss, 2014. "After the Boom–Commodity Prices and Economic Growth in Latin America and the Caribbean," IMF Working Papers 14/154, International Monetary Fund.
    7. Daan Steenkamp, 2014. "How volatile are New Zealand’s terms of trade? An international comparison," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 77, pages 3-14, June.
    8. Rhenals Monterrosa, Remberto & Gómez, Wilman, 2013. "La coyuntura macroeconómica reciente," PERFIL DE COYUNTURA ECONÓMICA, UNIVERSIDAD DE ANTIOQUIA - CIE, issue 22, pages 9-38, July.
    9. Jorge Toro & Aarón Garavito & David Camilo López & Enrique Montes, 2015. "El choque petrolero y sus implicaciones en la economía colombiana," BORRADORES DE ECONOMIA 013829, BANCO DE LA REPÚBLICA.
    10. Cristina Fernández Mejía & Leonardo Villar Gómez, 2014. "Temporary Resource Booms and Manufacturing Output: A Global Perspective," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 161-216, July-Dece.
    11. Melesse Tashu, 2015. "Drivers of Peru's Equilibrium Real Exchange Rate; Is the Nuevo Sol a Commodity Currency?," IMF Working Papers 15/26, International Monetary Fund.
    12. Adler, Gustavo & Magud, Nicolas E., 2015. "Four decades of terms-of-trade booms: A metric of income windfall," Journal of International Money and Finance, Elsevier, vol. 55(C), pages 162-192.

    More about this item

    Keywords

    Terms of trade; windfall; real income; aggregate saving; saving rate; trade shocks; trade shock; terms-of-trade shocks; domestic investment; Other; Open Economy Macroeconomics;

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