Current Account, Capital Formation and Terms of Trade Shocks: a Revisit of the Harberger-Laursen-Metzler Effect |
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Authors: | Hung-Ju Chen Chen-Min Hsu |
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Institution: | (1) Department of Economics, National Taiwan University, 21 Hsu-Chow Road, Taipei, 100, Taiwan |
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Abstract: | This paper extends the Blanchard model of a closed-economy to a three-good (exportable, importable and non-tradable goods)
open-economy model with capital accumulation and uncertain lifetimes to study the impacts of terms of trade shocks on the
current account. The simulation results show that a model with uncertain lifetimes is more appropriate to describe a small
open economy like Taiwan at the steady-state equilibrium than a model with infinite lifetimes. We find that the Harberger-Laursen-Metzler
effect is discernible for temporary or permanent terms of trade shocks. Furthermore, the steady state is a saddle point and
the speed of convergence of capital and consumption is quite low. |
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Keywords: | terms of trade current account Harberger-Laursen-Metzler effect |
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