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Terms-of-Trade Cycles and External Adjustment
Author:
Gustavo Adler
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Mr. Nicolas E Magud
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Alejandro M. Wernernull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 029
Language:
English
Publication Date:
13 Feb 2017
DOI:
https://doi.org/10.5089/9781475578485.001
ISBN:
9781475578485
ISSN:
1018-5941
Pages:
33
Keywords:
WP; commodity exporter; current account balance; exchange rate regime; terms of trade; external adjustment; current account; commodity importer; imports volume; current account response; current account dynamics; commodity price swing; Technology transfer; Exchange rate arrangements; Adjustment process; Exchange rate flexibility; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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 ½ 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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2017: Issue 029