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Traded Bond Denominations, Shock Persistence and Current Account Dynamics: Another Look at the H arberger– L aursen– M etzler Effect
Author(s) -
Fang Chen,
Lin PoSheng
Publication year - 2013
Publication title -
pacific economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.34
H-Index - 33
eISSN - 1468-0106
pISSN - 1361-374X
DOI - 10.1111/1468-0106.12032
Subject(s) - economics , shock (circulatory) , persistence (discontinuity) , hysteresis , bond , investment (military) , monetary economics , econometrics , variety (cybernetics) , dynamics (music) , mechanism (biology) , rational expectations , microeconomics , physics , mathematics , finance , statistics , condensed matter physics , engineering , acoustics , medicine , geotechnical engineering , quantum mechanics , politics , political science , law
This paper presents an analytical framework to clarify the mechanism through which terms‐of‐trade shocks are transmitted to savings, investment and the current account. By imposing specific preferences to simplify their calculations in the presence of hysteresis, conventional investigations have incorrectly interpreted the macroeconomic effects of terms‐of‐trade disturbances. By concentrating on traded bond denominations and shock persistence, the present analysis reexamines the H arberger– L aursen– M etzler effect and offers new insight. The relevant results provide a rational explanation as to why external price changes lead to a variety of phases of different signs in the evolution of the current account dynamics.