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Macroeconomic and Sectoral Effects of Terms-of-Trade Shocks; The Experience of the Oil-Exporting Developing Countries

  • International Monetary Fund

This paper investigates the impact of long-run terms-of-trade shocks. Analytically, we show that, if capital goods are largely importable or the labor supply is sufficiently elastic, then natural-resource booms increase aggregate investment and worsen the current account, but Dutch ‘Disease’ effects are weak. We then examine 18 oil-exporting developing countries during 1965-89. Favorable terms-of-trade shocks increase investment and (especially government) consumption, but reduce medium-term savings; hence, the current account deteriorates. Nontradable output increases, in response to real appreciations, but Dutch Disease effects are strikingly absent. Investment, consumption, and nontradable output respond more to a terms-of-trade decline than to an increase.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 99/134.

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Length: 56
Date of creation: 01 Oct 1999
Date of revision:
Handle: RePEc:imf:imfwpa:99/134
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  1. Reinhart, Carmen & Ostry, Jonathan, 1991. "Private Saving and Terms of Trade Shocks," MPRA Paper 13716, University Library of Munich, Germany.
  2. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 251-270.
  3. Reinhart, Carmen & Wickham, Peter, 1994. "Non-oil commodity prices: Cyclical weakness or secular decline?," MPRA Paper 13871, University Library of Munich, Germany.
  4. 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.
  5. Gavin, Michael, 1990. "Structural adjustment to a terms of trade disturbance : The role of relative prices," Journal of International Economics, Elsevier, vol. 28(3-4), pages 217-243, May.
  6. Neary, J Peter & van Wijnbergen, S, 1984. "Can an Oil Discovery Lead to a Recession? A Comment," Economic Journal, Royal Economic Society, vol. 94(374), pages 390-95, June.
  7. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
  8. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, 03.
  9. Warner, Andrew M., 1994. "Mexico's investment collapse: debt or oil?," Journal of International Money and Finance, Elsevier, vol. 13(2), pages 239-256, April.
  10. Sebastian Edwards, 1988. "Temporary Terms of Trade Disturbances, The Real Exchange Rate and the Current Account," NBER Working Papers 2629, National Bureau of Economic Research, Inc.
  11. Morley, Samuel A, 1992. "On the Effect of Devaluation during Stabilization Programs in LDCs," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 21-27, February.
  12. Partha Sen & Stephen J. Turnovsky, 1988. "Deterioration of the Terms of Trade and Capital Accumulation: A Reexamination of the Laursen-Metzler Effect," NBER Working Papers 2616, National Bureau of Economic Research, Inc.
  13. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-53, February.
  14. Peter Wickham & Carmen Reinhart, 1994. "Commodity Prices; Cyclical Weakness or Secular Decline?," IMF Working Papers 94/7, International Monetary Fund.
  15. Jonathan David Ostry & Carmen Reinhart, 1991. "Private Saving and Terms of Trade Shocks; Evidence From Developing Countries," IMF Working Papers 91/100, International Monetary Fund.
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