Terms-of-Trade Shocks and the Current Account

Wai Mun Chia ()
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Wai Mun Chia: Nanyang Technological University, Postal: Wai Mun Chia, School of Humanities and Social Sciences, Division of, Economics, Nanyang Technological University, Nanyang Avenue, Singapore 639798,

Journal of Economic Integration, 2005, vol. 20, 789-808

Abstract:

We investigate the relationship between terms-of-trade shocks and the current account of a small open economy in the presence of imperfect competition and nominal price rigidities in the nontraded sector. We show that a temporary termsof- trade improvement results in a current account surplus since the increase in consumption of traded goods is smaller than the magnitude of terms-of-trade shock. This result is consistent with the well-known Harberger-Laursen-Metzler effect. However, the effects of permanent term-of-trade shocks on current account depend mainly upon the intra- and intertemporal elasticities of substitution in consumption. When prices are perfectly flexible, permanent terms-of-trade shocks have no dynamic effects on the current account.

Keywords: Current account; Terms-of-trade; Imperfect competition; Nominal price rigidities; Harberger-Laursen-Metzler effect (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0341

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