Terms-of-Trade Cycles and External Adjustment

By Gustavo Adler, Nicolas E Magud, Alejandro M. Werner

February 13, 2017

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Gustavo Adler, Nicolas E Magud, and Alejandro M. Werner Terms-of-Trade Cycles and External Adjustment, (USA: International Monetary Fund, 2017) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the process of external adjustment to large terms-of-trade level shifts—identified with a Markov-switching approach—for a large set of countries during the period 1960–2015. We find that adjustment to these shocks is relatively fast. Current accounts experience, on average, a contemporaneous variation of only about ½ of the magnitude of the price shock—indicating a significant volume offset—and a full adjustment within 3–4 years. Dynamics are largely symmetric for terms-of-trade booms and busts, as well as for advanced and emerging market economies. External adjustment is driven primarily by offsetting shifts in domestic demand, as opposed to variations in output (also reflected in the response of import rather than export volumes), indicating a strong income channel at play. Exchange rate flexibility appears to have played an important buffering role during booms, but less so during busts; while international reserve holdings have been a key tool for smoothing the adjustment process.

Subject: Adjustment process, Balance of payments, Current account, Exchange rate arrangements, Exchange rate flexibility, Foreign exchange, Technology, Technology transfer

Keywords: Adjustment process, Commodity exporter, Commodity importer, Commodity price swing, Current account, Current account balance, Current account dynamics, Current account response, Exchange rate arrangements, Exchange rate flexibility, Exchange rate regime, External adjustment, Global, Imports volume, Technology transfer, Terms of trade, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/029
Stock No:

WPIEA2017029
ISBN:

9781475578485
ISSN:

1018-5941

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