Terms of Trade Shocks and the Current Account

December 1, 1998

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Paul Cashin, and C. John McDermott Terms of Trade Shocks and the Current Account, (USA: International Monetary Fund, 1998) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the relationship between terms of trade shocks, private saving, and the current account position. The relationship between these variables is theoretically ambiguous: an adverse transitory terms of trade shock can either induce a deterioration or an improvement in the current account, depending on whether the resulting income effects are greater or less than the resulting substitution effects. The substitution effects involve both intertemporally substituting consumption and intratemporally substituting consumption between importables and nontradables. The relative strength of these substitution effects is estimated using data for five OECD countries during 1970/95; both are found to exert large and significant effects on the current account balance.

Subject: Balance of payments, Consumption, Current account, Financial services, International trade, National accounts, Private savings, Real interest rates, Terms of trade

Keywords: Additional effects terms of trade shock, Adverse terms of trade shock, Australia and New Zealand, Consumption, Consumption-smoothing response, Critical value, Current account, Current account position, Intertemporal elasticity of substitution, Intratemporal elasticity of substitution, Private savings, Real interest rates, Shocks to fluctuation, Terms of trade, Terms of trade result, Terms of trade shock, Terms of trade shocks to fluctuation, Terms-of-trade-induced consumption-tilting, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/177
Stock No:

WPIEA1771998
ISBN:

9781451975048
ISSN:

1018-5941

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