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Do Developing Countries Possess any Built-in Mechanism that Copes with External Terms-of-trade Shocks?

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  • Chaudhuri, Sarbajit

Abstract

This theoretical note shows that developing countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics that can lessen the gravity of detrimental welfare consequence of exogenous terms-of-trade disturbances in terms of a two-sector, full-employment general equilibrium model with endogenous labour market distortion. The analysis leads to a couple of important policies that should be adhered to preserve this in-built system. Finally, it offers an important statistically testable hypothesis, empirical validation of which might have an important bearing on formulation of development policies in these countries.

Suggested Citation

  • Chaudhuri, Sarbajit, 2014. "Do Developing Countries Possess any Built-in Mechanism that Copes with External Terms-of-trade Shocks?," MPRA Paper 57736, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:57736
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    References listed on IDEAS

    as
    1. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-137, February.
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    4. Edwards, Sebastian & Levy Yeyati, Eduardo, 2005. "Flexible exchange rates as shock absorbers," European Economic Review, Elsevier, vol. 49(8), pages 2079-2105, November.
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    7. Broda, Christian, 2004. "Terms of trade and exchange rate regimes in developing countries," Journal of International Economics, Elsevier, vol. 63(1), pages 31-58, May.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Terms-of-trade shocks; Endogenous labour market imperfection; Shock-absorbing mechanism; Welfare; Developing countries; General equilibrium.;
    All these keywords.

    JEL classification:

    • D59 - Microeconomics - - General Equilibrium and Disequilibrium - - - Other
    • D6 - Microeconomics - - Welfare Economics
    • D60 - Microeconomics - - Welfare Economics - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F2 - International Economics - - International Factor Movements and International Business
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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