Terms of Trade Shocks and the Current Account

IMF Working Papers, December 1, 1998

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Terms of Trade Shocks and the Current Account

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Bibliographic details

• Authors: Paul Cashin, C. John McDermott
• Published: December 1, 1998
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451975048.001

Main research question and theoretical framework

• Examines the relationship between terms of trade shocks, private saving, and the current account position.
• Theoretical ambiguity highlighted:
  • An adverse transitory terms of trade shock can either induce a deterioration or an improvement in the current account.
  • Outcome depends on whether resulting income effects are greater or less than resulting substitution effects.
• Substitution effects decomposed into:
  • Intertemporal substitution of consumption.
  • Intratemporal substitution of consumption between importables and nontradables.

Empirical approach and scope

• Empirical estimation uses data for five OECD countries during 1970/95.
• The paper estimates the relative strength of the intertemporal and intratemporal substitution effects on the current account balance.

Key findings

• Both intertemporal and intratemporal substitution effects are found to exert large and significant effects on the current account balance.
• The sign of the current account response to an adverse transitory terms of trade shock depends on the relative magnitudes of income versus substitution effects (no single guaranteed direction).

Subjects and keywords (as listed in the paper)

• Subjects: Balance of payments, Consumption, Current account, Financial services, International trade, National accounts, Private savings, Real interest rates, Terms of trade
• Keywords: additional effects terms of trade shock, adverse terms of trade shock, Australia and New Zealand, Consumption, consumption-smoothing response, critical value, current account, current account position, intertemporal elasticity of substitution, intratemporal elasticity of substitution, Private savings, Real interest rates, shocks to fluctuation, Terms of trade, terms of trade result, terms of trade shock, terms of trade shocks to fluctuation, terms-of-trade-induced consumption-tilting, WP

Content in this bundle

• erms of Trade Shocks and the Current Account - WP/98/177
  • erms of Trade Shocks and the Current Account - WP/98/177 (Markdown version)
  • erms of Trade Shocks and the Current Account - WP/98/177 (PDF)