The Impact of Terms of Trade Shocks on a Small Open Economy: A Stochastic Analysis

Stephen J. Turnovsky

NBER Working Paper No. 3916 (Also Reprint No. r1804)
Issued in November 1991
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

This paper investigates the impact of change in the terms of trade on the economic performance of a small economy. Both the effects of unanticipated shocks and changes in the mean and variance of the probability distribution generating these disturbances are discussed. In all cases, the key element determining the response of the economy is the effect on the rate of growth of real wealth, to which all other real quantities are directly tied in equilibrium. Conditions for the Harberger-Laursen-Metzler effect to hold are discussed. The impact of these changes on economic welfare, as measured by expected discounted utility of the representative agent is also addressed.

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Document Object Identifier (DOI): 10.3386/w3916

Published: Journal of International Money and Finance 12, pp. 278-297 (1993). citation courtesy of

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