The Terms of Trade, Productivity Growth and the Current Account
Posted: 27 Dec 2000
This paper extends the analytical framework provided by Glick and Rogoff (1995. Journal of Monetary Economics 35, 159-192) to an economy with traded and nontraded goods, and it analyzes the impact of country-specific and global productivity shocks on the current account and investment. Each of these disturbances have different implications for the current account and investment that are largely consistent with the empirical results. First, the current account responds more than investment to country-specific traded productivity growth. Second, global traded productivity and country-specific nontraded productivity growth have no effect on the current account, but they have a significant impact on investment. Third, the global component of nontraded productivity is negligible and has no significant impact on either the current account or investment. In addition, the response of the current account and investment to relative prices (the terms of trade and exchange rate) are insignificant. This paper also discusses the potential reasons for it.
Keywords: Current account; Productivity; Terms of trade; Investment; Tradables and nontradables
JEL Classification: F32; F41
Suggested Citation: Suggested Citation