Current Account, Capital Formation and Terms of Trade Shocks: a Revisit of the Harberger-Laursen-Metzler Effect
Journal
Journal of Economics
Journal Volume
88
Journal Issue
2
Pages
179-201
Date Issued
2006
Date
2006
Author(s)
Hsu, Chen-Min
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.
Type
journal article
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