Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26208
Authors: 
Urban, Dieter M.
Year of Publication: 
2007
Series/Report no.: 
CESifo working paper 2164
Abstract: 
This paper explores theoretically and empirically the long run relation of the terms of trade (ratio of domestic and foreign prices of traded manufacturing goods) and economic growth of a pair of industrialized countries, one of which experiences a major catch-up process towards the other. It is shown theoretically that there is no mean reversion of the terms of trade towards PPP during a catch-up process, which suggests very long half-life times of terms of trade. Two theoretical interdependencies between the terms of trade and economic growth are offered: the home market effect and the productivity shock effect. These two effects are tested against each other in a cointegration analysis for Japan and the US from 1957 until 1997. Income appears to be a relevant variable to explain the terms of trade in the Post-Bretton-Woods era. The relevant empirical channel is the home market effect. However, financial market effects appear also to be relevant.
Subjects: 
convergence
real exchange rates
PPP
terms of trade
cointegration
JEL: 
F31
F41
O41
Document Type: 
Working Paper

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