Macroeconomic and Sectoral Effects of Terms-of-Trade Shocks: The Experience of the Oil-Exporting Developing Countries

Abstract

This paper investigates the impact of long-run terms-of-trade shocks. Analytically, we show that, if capital goods are largely importable or the labor supply is sufficiently elastic, then naturalresource booms increase aggregate investment and worsen the current account, but Dutch ‘Disease’ effects are weak. We then examine 18 oil-exporting developing countries during 196589. Favorable terms-of-trade shocks increase investment and (especially government) consumption, but reduce medium-term savings; hence, the current account deteriorates. Nontradable output increases, in response to real appreciations, but Dutch Disease effects are strikingly absent. Investment, consumption, and nontradable output respond more to a terms-oftrade decline than to an increase.