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Terms of Trade Shocks and Private Savings in the Developing Countries

Abdur Chowdhury ()

No 2013-07, Working Papers and Research from Marquette University, Center for Global and Economic Studies and Department of Economics

Abstract: This paper will take a broad based approach in analyzing the structure of the U.S. economy with a particular emphasis on the disruptive U.S. recession anThis study examines the impact of shocks to exchange rate and output uncertainty (volatility) on real private fixed investment (FI) in Canada, Germany, the United Kingdom, aEconomic agents in the developing countries are subject to tight credit constraints, which are more pronounced during bad state of nature. Thus, adverse shocks to commodity prices in the world market can force them to reduce savings by a larger amount than they would otherwise have. Empirical analysis using a dynamic GMM model and data from 45 developing countries confirm that most of the determinants of savings identified in the literature also apply to the developing countries. The transitory component in the terms of trade have a larger positive impact than the permanent component. This reflects the lack of access to foreign borrowing. Although the impact of terms of trade shocks is found to be asymmetric, the magnitude of the impact appears to be relatively small. The results are robust for alternative estimators, determinants and country groupings.nd the United States. The analysis is conducted using vector autoregressive models that contain the price level, real output, the volatility of real output, the real exchange rate, the volatility of the real exchange rate, an interest rate, and FI. The results yield important public policy implications with regard to the impact of output volatility of FI. Our analysis indicates that volatility shocks, measured as output volatility or exchange rate volatility, do not have a significant impact on FI for any country in our study.d financial crisis which began circa 2008. The role of the U.S. government and the implications high levels of fiscal debt have on the projected growth path of the U.S. economy will be the primary focus of the paper. The discussion will show that the U.S. has likely entered a new, much more difficult stage in its history of economic growth. The short to medium term growth potential of the U.S. economy has fallen below the trend level established since WWII. The flexibility of the U.S. economy will help foster the necessary adjustments; however, this new era will force difficult fiscal and monetary policy choices that have different implications for different section of the population. The policy makers must recognize the changing dynamics of the U.S. economy and they must be prudent in drafting policy that establishes a stronger foundation for future growth. Younger generations in particular will need to take notice of the decisions being made and plan accordingly as it relates to their spending, saving and investment habits.

Keywords: private savings; terms of trade; GMM estimation; developing countries; shocks (search for similar items in EconPapers)
JEL-codes: F10 E21 O50 (search for similar items in EconPapers)
Date: 2013-11
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Journal Article: Terms of trade shocks and private savings in the developing countries (2015) Downloads
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Handle: RePEc:mrq:wpaper:2013-07