Terms-of-Trade Cycles and External Adjustment

30 Pages Posted: 23 Mar 2017

See all articles by Gustavo Adler

Gustavo Adler

International Monetary Fund (IMF) - Research Department

Nicolás E. Magud

International Monetary Fund (IMF)

Alejandro M. Werner

International Monetary Fund (IMF)

Date Written: February 2017

Abstract

We study the process of external adjustment to large terms-of-trade level shifts-identified with a Markov-switching approach-for a large set of countries during the period 1960-2015. We find that adjustment to these shocks is relatively fast. Current accounts experience, on average, a contemporaneous variation of only about 1/2 of the magnitude of the price shock-indicating a significant volume offset-and a full adjustment within 3-4 years. Dynamics are largely symmetric for terms-of-trade booms and busts, as well as for advanced and emerging market economies. External adjustment is driven primarily by offsetting shifts in domestic demand, as opposed to variations in output (also reflected in the response of import rather than export volumes), indicating a strong income channel at play. Exchange rate flexibility appears to have played an important buffering role during booms, but less so during busts; while international reserve holdings have been a key tool for smoothing the adjustment process.

Keywords: Business cycles, Developed countries, Emerging markets, Terms of trade, Time series, Econometric models, Panel analysis, terms of trade; external adjustment; current account, external adjustment, current account, Open Economy Macroeconomics, International Business Cycles

JEL Classification: F32, F41, F44

Suggested Citation

Adler, Gustavo and Magud, Nicolas E. and Werner, Alejandro M., Terms-of-Trade Cycles and External Adjustment (February 2017). IMF Working Paper No. 17/29, Available at SSRN: https://ssrn.com/abstract=2938328

Gustavo Adler (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Nicolas E. Magud

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alejandro M. Werner

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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