IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Terms of Trade and the Transmission of Output Shocks in a Rational Expectations Model

  • Carol L. Osler

This paper analyses the effects of productivity shocks on the current and future terms of trade and on output in a two country framework. An overlapping-generations model is used in which individuals allocate their savings between domestic and foreign capital assets according to their preferences for risk and return. Since production in both countries is specialized, changes its the terms of trade affect investment returns in both countries; rational expectations regarding such changes are assumed and a new approach to analyzing the comparative statics of rational expectations equilibria is developed. It is concluded that a temporary, positive productivity shock to the home country will cause the domestic terms of trade to depreciate initially and then to appreciate slowly back towards its trend level. The depreciation causes foreign output to fall below trend, and causes a symmetric rise in domestic output, via its effects on capital stocks. The impact of a permanent productivity shock differs, however. In this case investors will reallocate their portfolios and increase their holdings of domestic assets, which are expected to earn higher returns. If the portfolio shifts are strong enough, they cause the terms of trade to appreciate initially. Foreign output falls and domestic output rises in this case as well, this time because of the portfolio shifts towards domestic capital.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.nber.org/papers/w2681.pdf
Download Restriction: no

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2681.

as
in new window

Length:
Date of creation: Aug 1988
Date of revision:
Handle: RePEc:nbr:nberwo:2681
Note: ITI IFM
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Web page: http://www.nber.org
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Helpman, Elhanan & Razin, Assaf, 1978. "Uncertainty and International Trade in the Presence of Stock Markets," Review of Economic Studies, Wiley Blackwell, vol. 45(2), pages 239-50, June.
  2. Grossman, Gene M & Razin, Assaf, 1984. "International Capital Movements under Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 286-306, April.
  3. Baron, David P. & Forsythe, Robert., . "Models of the Firm and International Trade Under Uncertainty," Working Papers 183, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Persson, Torsten & Svensson, Lars E O, 1985. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," Journal of Political Economy, University of Chicago Press, vol. 93(1), pages 43-65, February.
  5. Stockman, Alan C. & Svensson, Lars E. O., 1987. "Capital flows, investment, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 171-201, March.
  6. Joshua Aizenman & Jacob A. Frenkel, 1984. "Optimal Wage Indexation, Foreign-Exchange Intervention and Monetary Policy," NBER Working Papers 1329, National Bureau of Economic Research, Inc.
  7. Baily, Martin Neil, 1974. "Wages and Employment under Uncertain Demand," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 37-50, January.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:2681. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.