Aggregate spending and the terms of trade : There is a Laursen-Metzler effect

Abstract

Using the uncertain lifetimes overlapping generations model it is argued that terms of trade changes have very different effects depending on the net foreign asset position of the country. In a creditor country the deterioration of terms of trade has the classic Laursen-Metzler effect, since in order to sustain spending lending abroad is reduced. The reverse conclusion holds for a debtor country. It is also shown that these conclusions are robust with respect to the type of the terms of trade shock.