## Private Saving and Terms of Trade Shocks: Evidence From Developing Countries

_IMF Working Papers, October 1, 1991_

## Source details

**Canonical URL:** [Private Saving and Terms of Trade Shocks: Evidence From Developing Countries](https://www.imf.org/en/publications/wp/issues/2016/12/30/private-saving-and-terms-of-trade-shocks-evidence-from-developing-countries-976)

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## Bibliographic details
- Authors: Jonathan David Ostry, Carmen Reinhart
- Published: October 1, 1991
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451852318.001

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### Main conclusion
- The relationship between temporary terms of trade shocks and household (private) saving in developing countries is theoretically ambiguous: private saving may rise or fall in response to a transitory terms of trade shock.
- The direction of the response depends on two structural preference parameters: the intertemporal elasticity of substitution and the intratemporal elasticity of substitution between traded and nontraded goods.
- Empirical estimates of these two parameters are obtained from a sample of 13 developing countries and are used to draw implications for private saving responses to transitory terms of trade shocks.

### Theoretical analysis
- A transitory terms of trade shock can affect private saving through competing channels:
  - Consumption-smoothing effect mediated by the intertemporal elasticity of substitution.
  - Reallocation between traded and nontraded goods mediated by the intratemporal elasticity of substitution between traded and nontraded goods.
- Ambiguity arises because the magnitudes and signs of these elasticities determine whether the net effect on private saving is positive or negative.

### Empirical strategy and data
- Empirical estimates target two parameters:
  - The intertemporal elasticity of substitution.
  - The intratemporal elasticity of substitution between traded and nontraded goods.
- Data are from a sample of 13 developing countries.

### Key implications and findings
- Empirically estimated parameter values are used to infer the likely sign and magnitude of private saving responses to transitory terms of trade shocks for the sample.
- The paper draws implications for how private saving behavior in developing countries reacts to temporary improvements or deteriorations in terms of trade, given the estimated elasticities.

### Subjects and keywords
- Subject: Consumption, Financial services, Imports, International trade, National accounts, Private savings, Real interest rates, Terms of trade
- Keywords: Africa, aggregate consumption good, aggregate price deflator, Asia and Pacific, Consumption, consumption-smoothing effect, discount factor, Imports, Private savings, Real interest rates, Terms of trade, terms of trade shock, WP

*IMF Working Papers — Private Saving and Terms of Trade Shocks: Evidence From Developing Countries (Working Paper No. 1991/100), by Jonathan David Ostry and Carmen Reinhart.*

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/private-saving-and-terms-of-trade-shocks-evidence-from-developing-countries-976_