DYNAMICS OF THE TRADE BALANCE AND THE TERMS OF TRADE IN LDCS - THE S-CURVE

In their analysis of the dynamic behavior of terms of trade and the tr ade balance, Backus, Kehoe, and Kydland found that the lead and lag co rrelation between these two variables is S-shaped for a set of OECD co untries. Furthermore, they show that this S-curve can be replicated by a two-country dynamic general equilibrium model. Surprisingly, the S- curve also describes the dynamic relationship between terms of trade a nd the trade balance for a large set of LDCs. This S-curve can also be reproduced by a small-open-economy model which captures some importan t features of LDC economies. The S-curve is unexpectedly robust to var iations in the key parameters of the model. The model also captures th e business cycle properties of the LDC data. (C) 1998 Elsevier Science B.V. All rights reserved.