Terms Of Trade Shocks Research Articles

Equilibrium Tariff Schedules In Commercial Policy Games Under Uncertainty

AbstractAbstract A partial two country equilibrium model is built in which two different exogenous random shocks may occur. the governments simultaneously choose tariff functions relating their specific tariff to the level of an observable variable (volume of trade or international price). In the case of a “volume of trade shock” the Nash equilibria of this game are more protectionist the larger the possible trade swings and autarky is always an equilibrium outcome. In the case of a “terms of trade shock”, constant tariffs, at their Nash equilibrium in specific tariff levels are the only sensible equilibrium outcome.

Real Overvaluation, Terms of Trade Shocks and the Cost to Agriculture in Sub-Saharan Africa: The Case of the Sudan1

Starting from the premise that agriculture should play a pivotal role in the process of structural transformation and economic development in Sub-Saharan Africa; and taking the case of the Sudan, an African country with a sizeable agricultural economy, this paper addresses two inter-related issues in this regard. The first is the extent to which policy induced distortions influence the structure of incentives for agriculture where direct distortions induced by policies deployed directly on agriculture are distinguished from indirect ones caused by policies directed at the macro economic management of the economy. Second, the consequences for the growth of agriculture of these distortions given other growth fundamentals. Our analysis strongly supportsthe predictions of the endogenous growth model a la Easterly (1990), which calls foreconomic distortions to have deleterious effects on growth.

The International Adjustment Process: New Perspectives, Recent Experience and Future Challenges for the Financial System

A Opening Addresses.- I Introduction.- II The Role of Financial Markets in the Adjustment Process: the Finnish Experience.- III The International Adjustment Process.- IV Problems of Adjustment in Developing Countries.- B Current and Potential Balance of Payments Adjustment Problems.- V External Adjustment in Small Open Economies - Some Recent Experience.- VI Balance of Payments Adjustment Processes in Japan.- VII US External Adjustment in Response to the Lower Dollar: the J-Curve.- VIII Balance of Payments Adjustment Problems - the Case of West Germany.- C The Modus Operandi of The Process of Adjustment.- IX Current and Prospective Balance of Payments Problems.- X Policy Design in the Face of a Terms of Trade Shock.- XI Financial Interdependence and External Adjustment: Some Problems Posed by US Federal Government Indebtedness.- XII Mode Operatoire D'ajustement et Marches Speculatifs - Premiers Enseignements de la Crise Financiere Recente.- D Adjustment Policies.- XIII Exchange Rate Target Zones, the Louvre Accord and Policy Coordination.- XIV Reflections on World Economic Imbalances.- XV The International Economic Adjustment Mechanisms and the Coordination of Economic Policies.- XVI Recent Experience of International Monetary Policy Cooperation.- XVII The International Monetary System: Recent Developments and Key Issues.- E Special Problems of Adjustment in Developing Countries.- XVIII Special Problems of Adjustment in Developing Countries.- XIX Private Capital Flows and Developing Country Adjustment: Some Lessons of the Debt Crisis.- XX The Exchange Rate in the Adjustment Process of Less Developed Countries - a Multifarious Role.- XXI Foreign Lending Revisited 1880-1980.- F Concluding Address.- XXII Issues in International Economic Management.

Policy lessons from trade-focused, two-sector models

This article describes how to specify, solve, and draw policy lessons from small, two-sector, general equilibrium models of developing countries. In the last two decades, changes in the external environment and economic policies have been instrumental in determining the performance of these economies. The relationship between external shocks and policy responses is comrlex. We argue that two-sector models provide a good starting point for .uralysis because of the nature of the external shocks faced by developing countries in recent years and the policy responses they have elicited. These models capture the essential mechanisms by which external shocks and economic policies ripple through the economy. By and large, the shocks have involved the external sector: terms of trade shocks, such as the fourfold increase in the price of oil in 1973- 1974 or the decline in primary commodity pricks in the mid1980s; or cutbacks in foreign capital inflows. The policy responses most commonly proposed (usually by international agencica) have also been targeted at the external sector: (1) depreciating the real exchange rate to adjust to an adverse terms-of-trade shock or to a cutback in foreign borrowing and (2) reduction in distortionary taxes (some of which are trade taxes) to enhance economic efficiency and make the economy more competitive in world markets. A “minimalist” model that captures the shocks and policies mentioned above should therefore emphasize the external sector of the economy. Moreovei, many of the problems--and solutions-have to

Terms of trade shocks and structural adjustment in a small open economy: Dutch disease and oil price increases

A three-sector three-factor general equilibrium model of ‘Dutch Disease’ is developed providing yet another explanation for the expansion of the manufacturing sector in most of the oil-exporting countries and the concurrent decline in their agricultural sectors in the 1970s. The sectoral structure of the oil-exporting ‘small’ open economy is altered by an increase in its national income (the spending effect) and in the world price of manufactured goods relative to agricultural products (the world-price effect). While both effects undermine the agricultural sector, the world-price effect may offset the negative impact of the spending effect on the manufacturing sector, resulting in its expansion. The short-run analysis is of the standard Jones specific-factors model. In the long run, the capital rental and the price of the non-traded good are determined by world prices, and the transfer argument for the Dutch Disease real appreciation - the rise in the relative price of the non-traded good due to higher income - completely disappears. Also, demand effects alter non-traded and manufacturing output but have no impact on the agricultural sector. The world-price effect is the sole cause of the decline in the agricultural sector in the long run.

The Balance of Trade, Terms of Trade, and Real Exchange Rate: An Intertemporal Optimizing Framework

An intertemporal optimizing model of a small open economy is used to analyze how terms of trade changes affect real exchange rates and the trade balance. Temporary current, (expected) future, and permanent changes in the terms of trade are considered. The results suggest that the relationship between the terms of trade and the current account (the so-called Harberger-Laursen-Metzler effect) is sensitive to whether the model incorporates nontradable goods. Thus, the real exchange rate may be an important variable through which terms of trade shocks are transmitted to the current account.

The Balance of Trade, the Terms of Trade, and the Real Exchange Rate: An Intertemporal Optimizing Framework

This paper uses an intertemporal optimizing model of a small open economy to analyzehow terms of trade changes affect real exchange rates and the trade balance. We consider temporary current, anticipated future, and permanent changes in the terms of trade. The results suggest that the relationship between the terms of trade and the current account (the so-called Harberger-Laursen-Metzler effect) may be quitesensitive to whether or not the model incorporates nontraded goods. Thus, the realexchange rate may be an important variable through which terms of trade shocks are transmitted to the current account.

A Model of Output Fluctuations in a Small, Specialized Economy

THERE HAS BEEN A REVIVAL OF INTEREST IN EQUILIBRIUM models of the business cycle since the seminal papers of Lucas (1972 and 1973). Lucas sought to explain fluctuations in output and employment as equilibrium phenomena, arising from confusion about relative prices. This paper applies the Lucas closed economy model to the small, specialized economy and empirically tests the model. The Lucas model explains fluctuations in cyclical output in the closed economy as arising from domestic price level shocks. There have been several extensions of the Lucas model to the open economy which have output affected by foreign price level and terms of trade shocks, in addition to domestic price level shocks. These include papers by Leiderman (1979a and b), Burton (1980), Cox (1980), Saidi (1980), Parkin, Bentley and Fader (1981), Weber (1981), and Kimbrough (1983). These however deal with economies that explicitly or implicitly, produce a wide variety of goods and in which a large proportion of output is consumed domestically. The model in this paper, on the other hand, is specifically designed to capture the essential features of small developing economies a high degree of specialization, export orientation, and price taking. A novel feature of this model is the recognition that a small, specialized economy is similar to the theoretical island markets employed by Lucas in his 1973 paper. The key relative price variable is now the terms of trade and uncertainty about the terms of trade is used to generate a business