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Terms-of-trade cycles and external adjustment

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  • Adler, Gustavo
  • Magud, Nicolas E.
  • Werner, Alejandro

Abstract

We study the process of external adjustment to large terms-of-trade level shifts—identified with a Markov-switching approach—for a large set of countries during the period 1960–2015. We find that adjustment to these shocks is relatively fast. Current accounts experience, on average, a contemporaneous variation of only about ½ of the magnitude of the price shock—indicating a significant volume offset—and a full adjustment within 3–4 years. Dynamics are largely symmetric for terms-of-trade booms and busts, as well as for advanced and emerging market economies. External adjustment is driven primarily by offsetting shifts in domestic demand, as opposed to variations in output (also reflected in the response of import rather than export volumes), indicating a strong income channel at play. Exchange rate flexibility played an important buffering role during booms, but less so during busts; while international reserve holdings were a key tool for smoothing the adjustment process.

Suggested Citation

  • Adler, Gustavo & Magud, Nicolas E. & Werner, Alejandro, 2018. "Terms-of-trade cycles and external adjustment," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 103-122.
    • Handle: RePEc:eee:reveco:v:54:y:2018:i:c:p:103-122
    DOI: 10.1016/j.iref.2017.08.001
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    2. Dainauskas, Justas, 2023. "Time-varying exchange rate pass-through into terms of trade," LSE Research Online Documents on Economics 120000, London School of Economics and Political Science, LSE Library.
    3. Nchofoung, Tii N., 2022. "Trade shocks and labour market resilience in Sub-Saharan Africa: Does the franc zone response differently?," International Economics, Elsevier, vol. 169(C), pages 161-174.
    4. Trofimov, Ivan D., 2018. "Income terms of trade and economic convergence: Evidence from Latin America," MPRA Paper 87598, University Library of Munich, Germany.
    5. Nakatani, Ryota, 2018. "Adjustment to negative price shocks by a commodity exporting economy: Does exchange rate flexibility resolve a balance of payments crisis?," Journal of Asian Economics, Elsevier, vol. 57(C), pages 13-35.
    6. Camilo Alberto Cárdenas-Hurtado & Aaron Levi Garavito-Acosta & Jorge Hernán Toro-Córdoba, 2018. "Asymmetric Effects of Terms of Trade Shocks on Tradable and Non-tradable Investment Rates: The Colombian Case," Borradores de Economia 1043, Banco de la Republica de Colombia.
    7. Mahmood, Asif & Asif, Hashaam, 2023. "Terms-of-Trade Shocks, External Adjustments and Growth in Pakistan: How Much to Sacrifice," MPRA Paper 118726, University Library of Munich, Germany.
    8. Mr. Yan Carriere-Swallow & Mr. Nicolas E Magud & Juan Yepez, 2018. "No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect," IMF Working Papers 2018/213, International Monetary Fund.
    9. Dainauskas, Justas, 2023. "Time-varying exchange rate pass-through into terms of trade," Journal of International Money and Finance, Elsevier, vol. 137(C).
    10. Radovan Kovaèeviæ, 2017. "Current Account determinants in Southeast European (SEE) countries – panel approach," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 35(2), pages 391-424.
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    12. Constance de Soyres & Anna Rogantini Picco & Miss Randa Sab, 2019. "Debt Build-up in Frontier Low-Income Developing Countries (LIDCs) since 2012: Global or Country-specific Factors and Way Forward?," IMF Working Papers 2019/037, International Monetary Fund.
    13. Liu, Yanxin & Li, Huajiao & Guan, Jianhe & Feng, Sida & Guo, Sui, 2019. "The impact of Chinese steel product prices based on the midstream industry chain," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    14. Ivan Trofimov, 2021. "Income terms of trade and economic convergence: Evidence from Latin America," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 46(2), pages 41-67, June.
    15. Fabrice Nzepang & Saturnin Bertrand Nguenda Anya, 2022. "Effects of ICTs on the Terms of Trade of Sub-Saharan African Economies," Journal of African Trade, Springer, vol. 9(1), pages 107-119, December.

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    More about this item

    Keywords

    Terms of trade; External adjustment; Current account balance;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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