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The Response of the Current Account to Terms of Trade Shocks: A Panel-data Study

  • Christopher Kent

    (Reserve Bank of Australia)

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    This paper demonstrates that the response of the current account to shocks depends on the degree of persistence of these shocks. This result is in accordance with standard intertemporal models that incorporate both consumption smoothing and an investment response to shocks. The estimation procedure used to test this result takes advantage of the fact that the persistence of the terms of trade varies greatly across countries. Countries with the least persistent terms of trade shocks are shown to exhibit a positive relationship between these shocks and the current account; countries with the most persistent terms of trade shocks are shown to exhibit a negative relationship.

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    File URL: http://www.rba.gov.au/publications/rdp/1997/pdf/rdp9705.pdf
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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9705.

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    Date of creation: Oct 1997
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    Handle: RePEc:rba:rbardp:rdp9705
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    1. Pierre Danthine, Jean & Donaldson, John B., 1993. "Methodological and empirical issues in real business cycle theory," European Economic Review, Elsevier, vol. 37(1), pages 1-35, January.
    2. Ghosh, Atish R & Ostry, Jonathan D, 1995. "The Current Account in Developing Countries: A Perspective from the Consumption-Smoothing Approach," World Bank Economic Review, World Bank Group, vol. 9(2), pages 305-33, May.
    3. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
    4. Reuven Glick & Kenneth Rogoff, 1993. "Global versus country-specific productivity shocks and the current account," International Finance Discussion Papers 443, Board of Governors of the Federal Reserve System (U.S.).
    5. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    6. Ghosh, Atish R, 1995. "International Capital Mobility amongst the Major Industrialised Countries: Too Little or Too Much?," Economic Journal, Royal Economic Society, vol. 105(428), pages 107-28, January.
    7. Lane, Philip R & Tornell, Aaron, 1996. " Power, Growth, and the Voracity Effect," Journal of Economic Growth, Springer, vol. 1(2), pages 213-41, June.
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