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| Author: | Sen, P. |
| Title: | Terms-of-trade shock and the current account in a monetary economy. |
| Journal: | Economica
1990 : AUG, VOL. 57:227, p. 383-394 |
| Index terms: | TERMS OF TRADE EXCHANGE RATES |
| Language: | eng |
| Abstract: | The conventional wisdom emphasized the fact that a terms-of-trade worsening lowers real income, which in turn lowers savings and worsened the current account. This is called Laursen-Metzler Effect. This effect is analysed in an optimizing model where there is no capital mobility. Currency substitution allows money flows and does not require the restriction that trade be balanced at each point of time. In such a framework it was found that an unanticipated permanent change in the small country's terms of trade leads to a sequence of current account deficits. However, along the adjustment path, the economy's saving is positive. |
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