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 natural-resource booms increase aggregate investment and worsen the current account, but Dutch ‘Disease’ effects are weak. We then examine 18 oil-exporting developing countries during 1965-89. 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-of-trade decline than to an increase.
This paper documents the determinants of real oil price in the global market based on
SVAR model embedding transitory and permanent shocks on oil demand and supply as
well as speculative disturbances. We find evidence of significant differences in the
propagation mechanisms of transitory versus permanent shocks, pointing to the
importance of disentangling their distinct effects. Permanent supply disruptions turn out to
be a bigger factor in historical oil price movements during the most recent decades, while
speculative shocks became less influential.