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Terms-of-Trade Shocks and the Current Account

Author

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  • Chia, Wai Mun

    (Nanyang Technological University)

Abstract

We investigate the relationship between terms-of-trade shocks and the current account of a small open economy in the presence of imperfect competition and nominal price rigidities in the nontraded sector. We show that a temporary termsof- trade improvement results in a current account surplus since the increase in consumption of traded goods is smaller than the magnitude of terms-of-trade shock. This result is consistent with the well-known Harberger-Laursen-Metzler effect. However, the effects of permanent term-of-trade shocks on current account depend mainly upon the intra- and intertemporal elasticities of substitution in consumption. When prices are perfectly flexible, permanent terms-of-trade shocks have no dynamic effects on the current account.

Suggested Citation

  • Chia, Wai Mun, 2005. "Terms-of-Trade Shocks and the Current Account," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 20, pages 789-808.
    • Handle: RePEc:ris:integr:0341
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    More about this item

    Keywords

    Current account; Terms-of-trade; Imperfect competition; Nominal price rigidities; Harberger-Laursen-Metzler effect;
    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

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