Terms-of-Trade Cycles and External Adjustment

IMF Working Papers, February 13, 2017

Source details

Scope: large set of countries during the period 1960–2015.
Methodology: large terms-of-trade level shifts identified with a Markov-switching approach.
Core finding: adjustment to large terms-of-trade 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.
Full external adjustment occurs within 3–4 years.
Dynamics are largely symmetric for terms-of-trade booms and busts.
Dynamics are largely symmetric across advanced and emerging market economies.
External adjustment is driven primarily by offsetting shifts in domestic demand, rather than variations in output.
Adjustment patterns are reflected more strongly in the response of import volumes than export volumes, indicating a strong income channel.

Exchange rate flexibility:
- Appears to have played an important buffering role during booms.
- Played less of a buffering role during busts.
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

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