The Zero-root Property: Permanent vs Temporary Terms-of-trade Shocks

In this contribution, we show that the persistence and the time of occurrence of a terms-of-trade shock matter in determining steady-state changes: (i) a strong persistent (temporary) terms-of-trade worsening induces a long-run decline in the real expenditure greater than after a permanent disturbance; (ii) an adverse permanent shift in the terms of trade raises the real expenditure in the long run if the shock is expected to occur in the distant future. Finally, according to whether a temporary terms-of-trade worsening is anticipated or not, the current account displays a monotonic or a nonmonotonic adjustment. Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd.