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Terms of trade, the trade balance, and stability: the role of savings behavior

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  • Michael K. Gavin

Abstract

In conventional models of the open economy, the impact on the trade balance of a change in the terms of trade depends upon whether the Marshall-Lerner condition on demand elasticities is satisfied. This paper shows that, in a model which incorporates rational savings behavior, the link between the Marshall-Lerner condition and stability may survive intact or may be severed, depending upon the precise formulation of savings behavior.

Suggested Citation

  • Michael K. Gavin, 1991. "Terms of trade, the trade balance, and stability: the role of savings behavior," International Finance Discussion Papers 397, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:397
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    Citations

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    Cited by:

    1. Joseph E. Gagnon, 1996. "Net foreign assets and equilibrium exchange rates: panel evidence," International Finance Discussion Papers 574, Board of Governors of the Federal Reserve System (U.S.).
    2. Chiu, Yi-Bin & Sun, Chia-Hung D., 2016. "The role of savings rate in exchange rate and trade imbalance nexus: Cross-countries evidence," Economic Modelling, Elsevier, vol. 52(PB), pages 1017-1025.

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    Keywords

    International trade; Balance of trade;

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