Macroeconomic and Sectoral Effects of Terms-of-Trade Shocks : The Experience of the Oil-Exporting Developing Countries

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.
Publication date: October 1999
ISBN: 9781451855586
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International - Economics , International - Economics , Terms of trade , natural resources , Dutch Disease , natural-resource , trade shocks , terms-of-trade shocks , natural-resource sector

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