Terms-of-Trade Cycles and External Adjustment

Gustavo Adler, Nicolas Magud and Alejandro Werner

No 2017/029, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; commodity exporter; current account balance; exchange rate regime; terms of trade; external adjustment; current account; commodity importer; imports volume; current account response; current account dynamics; commodity price swing; Technology transfer; Exchange rate arrangements; Adjustment process; Exchange rate flexibility; Global (search for similar items in EconPapers)
Pages: 33
Date: 2017-02-13
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.imf.org/external/pubs/cat/longres.aspx?sk=44655 (application/pdf)

Related works:
Journal Article: Terms-of-trade cycles and external adjustment (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2017/029

Ordering information: This working paper can be ordered from
http://www.imf.org/external/pubs/pubs/ord_info.htm

Access Statistics for this paper

More papers in IMF Working Papers from International Monetary Fund International Monetary Fund, Washington, DC USA. Contact information at EDIRC.
Bibliographic data for series maintained by Akshay Modi ().