Deterioration Of The Term Of Trade And Capital Eccumulation A Reexamination Of The Laursen-Metzler Effect
This paper analyzes the effects of both a permanent and a temporary deterioration In the terms of trade on a small open economy. The model, based on intertemporal optimization, emphasizes the labor-leisure choice and the role of capital accumulation There are two main conclusions to be drawn from the analysis. The first 1s that in all cases the transitional dynamics depends critically upon the long-run response of the capital stock to the deterioration m the terms of trade. This has been shown to consist of a substitution effect, which is negative, together with an income effect, which is positive. Secondly, since the steady state equilibrium depends upon the initla1 conditions of the economy, a temporary shock, by altering these initial conditions for some later date when the shock ceases, leads to a permanent effect on the economy. In the case where the substitution effect dominates, a deterioration in the terms of trade leads to a short-run reduction in investment and a short-run current account surplus, contrary to the Laursen-Metzler effect. However, when the long-run income effect dominates, the deterioration m the terms of trade leads to a short-run investment boom, accompanied by a short-term current account deficit. The Laursen-Metzler effect prevails, although it is driven by investment, rather than by savings behavior.
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- 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.
- Torsten Persson & Lars E.O. Svensson, 1983. "Current Account Dynamics and the Terms of Trade: Harberger-Laursen-Metzler Two Generations Later," NBER Working Papers 1129, National Bureau of Economic Research, Inc.
- Matsuyama, Kiminori, 1987. "Current account dynamics in a finite horizon model," Journal of International Economics, Elsevier, vol. 23(3-4), pages 299-313, November.
- Obstfeld, Maurice, 1982.
"Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?,"
The Quarterly Journal of Economics,
MIT Press, vol. 97(2), pages 251-70, May.
- Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
- Abel, Andrew B & Blanchard, Olivier J, 1983.
"An Intertemporal Model of Saving and Investment,"
Econometric Society, vol. 51(3), pages 675-92, May.
- Obstfeld, Maurice, 1983.
"Intertemporal price speculation and the optimal current-account deficit,"
Journal of International Money and Finance,
Elsevier, vol. 2(2), pages 135-145, August.
- Maurice Obstfeld, 1983. "Intertemporal Price Speculation and the Optimal Current-Account Deficit," NBER Working Papers 1100, National Bureau of Economic Research, Inc.
- Matsuyama, Kiminori, 1988. "Terms-of-Trade, Factor Intensities and the Current Account in a Life-Cycle Model," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 247-62, April.
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