Exchange rate changes and endogenous terms of trade effects in a small open economy |
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Authors: | Robyn Swift |
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Institution: | Department of Accounting, Finance and Economics, Griffith University, Nathan Campus, Brisbane Qld 4111, Australia |
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Abstract: | This paper shows that the small-country assumption of dependent-economy models is unlikely to hold for many of the cases in which this class of models is used, for example, in the analysis of a terms of trade shock in the “commodity currency” models. When a shock affects most or all of the small countries exporting a commodity, the combined exchange rate effects will result in endogenous terms of trade changes even for those countries too small to individually affect world markets. The paper also explores the possible implications of these secondary terms of trade changes for the dependent-economy models. |
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Keywords: | Exchange rates Terms of trade Small country assumption Dependent economy models Commodity currency Small open economy |
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