Current Account, Capital Formation and Terms of Trade Shocks: a Revisit of the Harberger-Laursen-Metzler Effect

Chen, Hung‐Ju; Hsu, Chin-Hsien

doi:10.1007/s00712-006-0179-5

Cited by 5 publications

(3 citation statements)

References 38 publications

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“…Ostry and Reinhart (1992) and Cashin and McDermott (2002) adopted a simple three-good model to empirically test the effects of terms-of-trade shocks on economic performance for both developing and industrialized countries. Chen and Hsu (2006) also considered a three-good open economy in Which capital was imported from abroad. However, without the production of capital.…”

Section: -X(l + :~)mentioning

confidence: 99%

Demand Changes and Real Exchange Rate Dynamics in a Finite‐Horizon Model with Sectoral Adjustment Costs

Chen

Hsu

2009

Southern Economic Journal

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In this paper, we use the Blanchard‐type uncertain lifetime overlapping generations framework to develop a three‐good open economy to examine the effects of demand changes on the economic performance of small open economies with sectoral adjustment costs. Our simulation results reveal a discernible Harberger‐Laursen‐Metzler effect on both temporary and permanent terms‐of‐trade shocks. The inclusion of sectoral adjustment costs generates persistent deviations of the real exchange rate from its long‐run equilibrium in response to terms‐of‐trade shocks, with the degree of sectoral adjustment costs having an effect on the subsequent dynamic transition of the economy. We also find that an increase in the mortality rate leads to a lowering of the current account.

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Section: -X(l + :~)mentioning

confidence: 99%

Demand Changes and Real Exchange Rate Dynamics in a Finite‐Horizon Model with Sectoral Adjustment Costs

Chen

Hsu

2009

Southern Economic Journal

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“…Therefore, it is imperative to investigate the effect of increased terms of trade on Pakistan’s trade balance. Following Harberger (1950) and Laursen and Metzler (1950), HLM effect suggests that an exogenous increase in terms of trade in a small but open economy results in an improvement in that country’s trade balance which is appropriate for a developing economy (Berument & Dincer, 2005; Bouakez & Kano, 2008; Chen & Hsu, 2006; Huang & Meng, 2007; Jawaid & Raza, 2013; Sobrino, 2011; Tsen, 2006). Similarly, Pakistan is also one of the developing countries that largely depends on foreign debt liabilities and consecutively facing current account deficit problem.…”

Section: Introductionmentioning

confidence: 99%

Does Harberger–Laursen–Metzler (HLM) Exist in Pakistan? Cointegration, Causality and Forecast Error Variance Decomposition Tests

Afza

Ahmed

Shahbaz

2016

Global Business Review

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This article investigates the validation of Harberger-Laursen-Metzler hypothesis using Pakistani data over the period of 1978Q1-2012Q4. We have used Gregory-Hansen cointegration approach accommodating structural break in the series. The results confirm the presence of cointegration between the variables. The impact of terms of trade is positive on Pakistan's trade balance. Domestic income improves local trade balance. Foreign income has a positive impact on Pakistan's trade balance. The causality analysis indicates the presence of feedback effect between terms of trade and trade balance. Domestic income Granger causes trade balance. The unidirectional causality is running from foreign income to Pakistan's trade balance. This study opens up new directions for policymakers for improvements in terms of trade to sustain trade balance in Pakistan.

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“…More recently, a number of subsequent studies, such as Obstfeld and Rogoff (), Kent and Cashin (), Otto (), Giuliodori (), Chen and Hsu (, ), Cardi (), Bouakez and Kano () and Eicher et al . (), have made substantial progress in their empirical and theoretical analyses.…”

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Traded Bond Denominations, Shock Persistence and Current Account Dynamics: Another Look at the Harberger–Laursen–Metzler Effect

Chen

Lin

2013

Pacific Economic Review

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This paper presents an analytical framework to clarify the mechanism through which terms‐of‐trade shocks are transmitted to savings, investment and the current account. By imposing specific preferences to simplify their calculations in the presence of hysteresis, conventional investigations have incorrectly interpreted the macroeconomic effects of terms‐of‐trade disturbances. By concentrating on traded bond denominations and shock persistence, the present analysis reexamines the Harberger–Laursen–Metzler effect and offers new insight. The relevant results provide a rational explanation as to why external price changes lead to a variety of phases of different signs in the evolution of the current account dynamics.

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Current Account, Capital Formation and Terms of Trade Shocks: a Revisit of the Harberger-Laursen-Metzler Effect

Cited by 5 publications

References 38 publications

Demand Changes and Real Exchange Rate Dynamics in a Finite‐Horizon Model with Sectoral Adjustment Costs

Demand Changes and Real Exchange Rate Dynamics in a Finite‐Horizon Model with Sectoral Adjustment Costs

Does Harberger–Laursen–Metzler (HLM) Exist in Pakistan? Cointegration, Causality and Forecast Error Variance Decomposition Tests

Traded Bond Denominations, Shock Persistence and Current Account Dynamics: Another Look at the Harberger–Laursen–Metzler Effect

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