Dynamics of the Trade Balance and the Terms of Trade in Ldcs : The S-Curve

Backus, Kehoe and Kydland in their analysis of the dynamic effect of terms of trade on the trade balance found that the lead and lag correlation between these two variables is S-shaped for a set of OECD countries. Furthermore, they show that this S-curve can be replicated by a two-country dynamic general equilibrium model. Surprisingly, the S-curve describes also fairly well the dynamic effect of terms of trade on the trade balance for a large set of LDCs. This S-curve can also be reproduced by a one-country model that captures some important features of LDC economies. The S-curve is unexpectedly robust to variations in the key parameters of the model