Exchange rate changes and endogenous terms of trade effects in a small open economy
Author(s)
Swift, Robyn
Griffith University Author(s)
Year published
2004
Metadata
Show full item recordAbstract
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.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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Journal Title
Journal of Macroeconomics
Volume
26
Publisher URI
Copyright Statement
© 2004 Elsevier : Reproduced in accordance with the copyright policy of the publisher : This journal is available online - use hypertext links.
Subject
Economic Theory
Applied Economics