Private Saving and Terms of Trade Shocks: Evidence From Developing Countries

IMF Working Papers, October 1, 1991

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Private Saving and Terms of Trade Shocks: Evidence From Developing Countries

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Bibliographic details

• Authors: Jonathan David Ostry, Carmen Reinhart
• Published: October 1, 1991
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451852318.001

Main conclusion

• The relationship between temporary terms of trade shocks and household (private) saving in developing countries is theoretically ambiguous: private saving may rise or fall in response to a transitory terms of trade shock.
• The direction of the response depends on two structural preference parameters: the intertemporal elasticity of substitution and the intratemporal elasticity of substitution between traded and nontraded goods.
• Empirical estimates of these two parameters are obtained from a sample of 13 developing countries and are used to draw implications for private saving responses to transitory terms of trade shocks.

Theoretical analysis

• A transitory terms of trade shock can affect private saving through competing channels:
  • Consumption-smoothing effect mediated by the intertemporal elasticity of substitution.
  • Reallocation between traded and nontraded goods mediated by the intratemporal elasticity of substitution between traded and nontraded goods.
• Ambiguity arises because the magnitudes and signs of these elasticities determine whether the net effect on private saving is positive or negative.

Empirical strategy and data

• Empirical estimates target two parameters:
  • The intertemporal elasticity of substitution.
  • The intratemporal elasticity of substitution between traded and nontraded goods.
• Data are from a sample of 13 developing countries.

Key implications and findings

• Empirically estimated parameter values are used to infer the likely sign and magnitude of private saving responses to transitory terms of trade shocks for the sample.
• The paper draws implications for how private saving behavior in developing countries reacts to temporary improvements or deteriorations in terms of trade, given the estimated elasticities.

Subjects and keywords

• Subject: Consumption, Financial services, Imports, International trade, National accounts, Private savings, Real interest rates, Terms of trade
• Keywords: Africa, aggregate consumption good, aggregate price deflator, Asia and Pacific, Consumption, consumption-smoothing effect, discount factor, Imports, Private savings, Real interest rates, Terms of trade, terms of trade shock, WP

IMF Working Papers — Private Saving and Terms of Trade Shocks: Evidence From Developing Countries (Working Paper No. 1991/100), by Jonathan David Ostry and Carmen Reinhart.