Dynamic effects of a terms-of-trade shock on a small open economy

Cha, Baekin

doi:10.1016/0165-1765(93)90038-e

Cited by 2 publications

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“…The results show that allowing for capital goods imports has major consequences for the validity of the Laursen-Metzler effect A permanent terms-of-trade windfall raises investment and must cause a ' For example, Murphy (1992), Sen and Turnovsky (1989), van Wmcoop (1993) and also Cha (1993), all asume that capital goods are produced only domesdcally. In an earlier contribution, Bnrno (1982) explores the consequences of a resource boom in a two-sector economy employing traded capital goods, but under the simplifying assumption that the boonung sector uses no capital.…”

Section: Introductionmentioning

confidence: 97%

“…IJ l e"'P. (r(s))] T dsJ where the second equality follows from the constancy of X over time, and W denotes nofinnmcial wealth, defined as Cha (1993) for an analysis of permanet rms-of-bade shocks in an intertemporally-optimizing famork wich allows the ate of time preference to differ from the world interest rate. Unrlic this paper, however, Chs assumesdt invesbt goods are produced domestically, and therefore output and thc capital stocik are wholly unaffected by terms of tmde change.…”

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confidence: 99%

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Terms-of-trade shocks and optimal investment: another look at the Laursen-Metzler effect

Servén

1999

Journal of International Money and Finance

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Section: Introductionmentioning

confidence: 97%

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confidence: 99%

Terms-of-trade shocks and optimal investment: another look at the Laursen-Metzler effect

Servén

1999

Journal of International Money and Finance

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Terms-of-Trade Shocks and Optimal Investment: Another Look at the Laursen-Metzler Effect

Servén

1999

Policy Research Working Papers

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Conventional analyses of the effect of terms-of-tradcIn this framework, the response to a permanent terms shocks provide a misleading view of their impact on of trade improvement is unambiguous: The long-run investment and the current account, says Serven, because capital stock, and rhus investment, must rise, and the capital goods imports are excluded from the analytical current account must deteriorateexactly the opposite framework. He argues that such an exclusion is both of the Laursen-Metzler effect. arbitrary and unrealistic.A transitory improvement in the terms of trade raises Servrn reexamines the consequences of permanent and saving but has an uncertain effect on investment. So, the transitory changes in the terms of trade in a rational-impact on the current account is generally ambiguous expectations model of a small open economy with and is shown to depend on three factors: the import intertemporally optimizing agents, and with trade in both contents of consumption and investment, the duration of consumption and capial goods.the windfall, and the degree of intertemporal substitutability in both consumption and investment.This papera product of the Macrocconomics and Growth Division, Policy Research Departmentis part of a larger effort in the department to understand the macroeconomic impact of policy shifts and ext:rnal shocks. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Emily Khine, room Nl 1-061, extension 37471 (29 pages). February 199S. The Policy Research Working Paper Series disseminates the findings of work m progress to encouwage the exchange of ideas about development waues. An objectie of the sries is to get the findings out quickly. even if the presetions are less than fully polisheb The papers carry tbe names of the asthors and sbouid be wsed and cited accordingly. The findings, interpeations, and conclisions are the authors' own and should not he attributed to the World Bank, its Executive Board of Directorsm or any of its member countrim Produced by the Policy Research Dissemination Center * I thank Peter Montiel for detailed comments, and Lawrence Bouton for efficient research assistance. 'Tlese figures are derived from the UNCTAD daabase; imports of capital goods exrludepassengercars andotherconsumer durables. I am grateful to Lant Pritchett for kindly providing this data.

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Dynamic effects of a terms-of-trade shock on a small open economy

Cited by 2 publications

References 5 publications

Terms-of-trade shocks and optimal investment: another look at the Laursen-Metzler effect

Terms-of-trade shocks and optimal investment: another look at the Laursen-Metzler effect

Terms-of-Trade Shocks and Optimal Investment: Another Look at the Laursen-Metzler Effect

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