The Terms of Trade, Investment and the Current Account

Oil booms and subnational public investment: a case-study for Colombia

“…Results from theoretical analyses are ambiguous and depend on several assumptions. Murphy (1992) developed an optimization model to determine the macroeconomic effects of terms-of-trade shocks in the short and long run. He found that deterioration of terms-of-trade leads to capital accumulation in the long run, and increases current account deficit, while in the short run the effect on investment and current account depends on fundamentals of the economy.…”

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

“…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.…”

“…Sen and Turnovsky (1989) develop an infinite-horizon model likewise inr:orporating capital accumulation subject to installation costs; their framework underscores the labor-leisure decision as the r.entral mechanism of adjustment to terms-of-trade shocks. Murphy (1992) introduces a similar specification of investment in a two-sector framework with traded and nontraded goods to explore the contribution of real exchance rate adjustment to shaping the current account response to terms-of-trade disturbances. Van Wincoop (1993) investigates the consequences of a resource boom in an three-sector economy including a construction industry producing nontraded capital.…”

Endogenous Restrictions for Least Developed Economies

“…Evidence on the long-run trend towards deterioration in the terms of trade and the resultant real effects on small, open, developing economies abounds. Numerous studies have tackled the problem, including Serven (1995), Cha (1993), Mendoza (1992), Murphy (1992), Gavin (1992Gavin ( , 1990, Cuddington and Urzua (1989), Sen and Turnovsky (1989), Svensson andRazin (1983), andBranson andKatselli (1980). Further, the terms-of-trade fluctuations have been the main concern of the United Nations' Conferences on Trade and Development (UNCTAD).…”