Terms of Trade Shocks and the Current Account

Author/Editor:

Paul Cashin ; C. John McDermott

Publication Date:

December 1, 1998

Electronic Access:

Free Full Text (PDF file size is 2121 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 98/177

Subject:

English

Publication Date:

December 1, 1998

ISBN/ISSN:

9781451975048/1018-5941

Stock No:

WPIEA1771998

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

40

Please address any questions about this title to publications@imf.org