اثرات دینامیکی شوک های قوانین و مقررات تجارت: تاثیر بر بدهی و رشد

By specifying borrowing costs to increase with the debt to equity ratio we generate procyclical debt flows in response to terms of trade shocks, consistent with empirical evidence. Since procyclical capital flows attract unsustainably large capital inflows during favorable shocks and force countries to overadjust to adverse shocks, we obtain nonlinear adjustments, involving possible overshooting of the long-run debt level. By linking growth, procyclical debt, and terms of trade shocks, we add a distinctly dynamic component to the “Harberger–Laursen–Metzler effect”. We also examine the welfare implications of the terms of trade shocks and find substantial impact of even intermediate sized shocks.

Adverse shocks to a country's terms of trade – the relative price of its exports to imports – not only may disrupt the economy's growth, but also may introduce considerable instability. The impacts of such shocks have been extensively documented. For example, Mendosa (1995) and Kose (2002) find that terms of trade shocks account for at least half of the output volatility in developing countries, while Barro (1996) documents that sustained deteriorations in a country's terms of trade can have a significantly negative impact on growth.1 Recent empirical evidence links terms of trade shocks not only to changes in economic growth and volatility, but also to changes in borrowing premiums and to the severity of debt crises.2 This link has not been modeled formally, and in this paper we examine specifically how the effects of terms of trade shocks on growth and instability are influenced by debt and international capital flows. The effects of terms of trade shocks on a small open economy have been extensively studied since the early 1950s when Harberger (1950) and Laursen and Metzler (1950) predicted that a deterioration in the terms of trade would reduce real income, thereby lowering savings and investment to cause a deterioration of the current account balance. The “Harberger–Laursen–Metzler effect” is purely static, however, giving rise to an extensive literature that re-examined the effects of terms of trade shocks within an intertemporal framework.3 One general conclusion of the intertemporal literature is that the Harberger–Laursen–Metzler effect is sensitive to several key features of the economy. These include the exact specification of the nature of (i) preferences (Obstfeld, 1982, Svensson and Razin, 1983, Mansoorian, 1993 and Ikeda, 2001); (ii) production in terms of labor supply (Bean, 1986) and capital (Sen and Turnovsky, 1989); (iii) international capital market imperfections (Obstfeld, 1982; Huang and Meng, 2004); and (iv) duration of the shock (Obstfeld, 1982 and Persson and Svensson, 1985). Previous investigations of the link between capital market imperfections and terms of trade shocks have been motivated by the potential for financial flows to smooth consumption following adverse shocks. However, this would imply that debt flows are countercyclical, contradicting the data that clearly suggest that debt flows are procyclical.4 This procyclicality is thought to be driven by external supply factors that amplify the impact of the initial shock and exacerbate growth booms and busts. One such factor that has been closely tied in the data to procyclicality is the change in risk perception on the part of creditors (see, e.g., Kaminsky et al., 2003). Specifically, it is thought that frequently updated credit ratings influence the quantity and the price of international capital. Under such circumstances procyclical capital flows attract unsustainably large capital inflows during favorable shocks and force countries to overadjust to adverse shocks (see World Bank, 1993, p. 20; Easterly et al., 1999). In this paper we seek to model such adjustment dynamics in terms of trade shocks. We extend a simple growth model to incorporate the role of endogenous country-specific borrowing premiums. The objective is to examine the resulting debt flows to see if these external factors amplify contractions (expansions) in the case of adverse (favorable) terms of trade shocks. Interest in the interplay between terms of trade shocks, risk, debt, and growth has gained significant momentum since the Asian crisis. Broda and Tille (2003) provide an extensive survey to show how strongly terms of trade, debt, growth, and risk are linked in developing countries. Min (1998) and Min et al. (2003) find that worsening terms of trade are associated with higher yield spreads, which is a key element of our model below. Terms of trade shocks have also been closely linked to changes in capital flows by Caballero and Panageas (2003) and Calvo et al. (2004), who find that negative terms of trade shocks increase the likelihood of a sudden stop in capital inflows and large interest rate upswings. This evidence is consistent with the findings by Broda (2004) and Broda and Tille (2003), who observe that most crises are preceded by negative terms of trade shocks that caused substantial economic fluctuations and disruption to output growth. By focusing on the response of capital flows to terms of trade shocks we are extending the Harberger–Laursen–Metzler literature in four important directions. First, we focus on a growing developing country that is facing an imperfect capital market, in contrast to most of the literature cited above, which assumes perfect world capital markets. Indeed, problems stemming from deteriorations in terms of trade are likely to be more serious for developing economies that face restricted access to world financial markets. Second, we highlight how important the precise nature of the capital market imperfection is for its consequences for the economy. Previous authors have specified the borrowing cost to increase with the nation's level of debt. This specification, together with a constant rate of time preference and inelastic labor supply, implies that terms of trade shocks have no dynamic effects. The only response is that consumption fully adjusts instantaneously, with the current account remaining unchanged. 5 But in reality the borrowing premium depends not on the nation's level of absolute debt, but rather on its ability to finance its debt, a measure that can be conveniently proxied by the country's debt to equity ratio. 6 In this case, our model generates implications that can serve as theoretical underpinnings for the observed growth, risk and debt dynamics of developing countries. Adverse terms of trade shocks lead to transitions that involve recessions and procyclical debt adjustments. The debt adjustment may even be excessive, in that the debt level may overshoot its long-run equilibrium during the transitions. In addition, we show that financial markets can prolong terms of trade induced recessions. The adverse changes in the borrowing risk premium can force countries to pay down debt further and faster than necessary to lower the borrowing costs and jumpstart investment again. We therefore find ample justification for terms of trade adjustment facilities such as the IMF's “Exogenous Shocks Facility” introduced in 2005. A third novel result is that the current account response to a terms of trade shock is shown to depend critically on a country's credit status – i.e., whether it is a debtor or creditor. In the former case, we find that an adverse terms of trade shock leads to a decline in growth accompanied by a procyclical decline in debt that causes an improvement in the current account, contradicting the Harberger–Laursen–Metzler proposition. In the latter case, we find the opposite: an increase in growth together with a decrease in the holdings of foreign assets, consistent with Harberger–Laursen–Metzler. The Harberger–Laursen–Metzler literature can also be interpreted as implicitly involving welfare judgments, where welfare is proxied by measures such as expenditures and current account balances.7 Our fourth contribution is to assess the welfare costs explicitly, by evaluating the effect of terms of trade changes on the consumer's intertemporal utility as the economy transitions to its equilibrium path. We show that an adverse terms of trade shock generates both a negative income effect and a wealth effect that is negative, and therefore reinforcing for a debtor country, but positive, and therefore offsetting, for a creditor economy. For a plausible parameterization we find that a 20% deterioration in the terms of trade may lead to a welfare loss on the order of 10–15% in equivalent variation consumption flows, depending upon the chosen consumption mix. Interestingly, our simulations indicate that the magnitude of the wealth effect is reduced as capital market imperfections increase because the economy is less reliant on foreign financing in the initial equilibrium – which reduces the impact of a terms of trade shock. The remainder of the paper proceeds as follows. Section 2 sets out the analytical framework, while Section 3 derives the macroeconomic dynamic equilibrium. Because of the complexity of the model it is necessary to resort to numerical simulations and these are conducted in Section 4, while Section 5 concludes.

We set out to add a distinctly dynamic component to the “Harberger–Laursen–Metzler effect” in order to link growth, procyclical debt, and terms of trade shocks. Key to our approach is the assumption to tie international creditworthiness (and hence the borrowing risk premium) not only to the level of debt, but to a country's debt to equity ratio. While the link between capital market imperfections and terms of trade shocks has previously been investigated, the literature implied that associated debt flows are countercyclical, which is inconsistent with the data. We show that the procyclicality of debt in response to terms of trade shocks is exactly caused by the change in risk perception on the part of creditors. The nonlinear adjustment then involves possible overshooting of the long-run debt level, since procyclical capital flows attract unsustainably large capital inflows during favorable shocks and force countries to overadjust to adverse shocks. We also explicitly examine the welfare implications of the terms of trade shocks and calibrate their magnitudes. Given the importance of terms of trade shocks in the empirical literature, it is no surprise that we find substantial impact of even intermediate sized shocks (of the order of 20%). Most importantly perhaps, the calibrations highlight that the magnitude of the wealth effect is reduced when a country's dependence on (or exposure to) international capital markets declines. Finally, we may note that we have followed the literature and focused on terms of trade shocks associated with the import of a consumption good. Many developing countries are involved in the import of productive inputs. In contrast to the price shocks we have been analyzing, changes in their relative prices have direct effects on production leading to long-run effects on capital and output. To extend the analysis to deal with this case is straightforward but important to obtain a more complete understanding of the impact of terms of trade shocks on developing economies.