Terms of Trade Shocks and the Current Account

Paul Cashin () and Christopher McDermott

No 1998/177, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; terms of trade shock; current account position; Terms of trade; current account; intertemporal elasticity of substitution; intratemporal elasticity of substitution; terms of trade result; consumption-smoothing response; critical value; terms-of-trade-induced consumption-tilting; terms of trade shocks to fluctuation; adverse terms of trade shock; additional effects terms of trade shock; shocks to fluctuation; Consumption; Private savings; Real interest rates; Australia and New Zealand (search for similar items in EconPapers)
Pages: 40
Date: 1998-12-01
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Citations: View citations in EconPapers (25)

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Working Paper: Terms of Trade Shocks and the Current Account (1999)
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