Terms of Trade Shocks and the Current Account in Small Island States

Abstract

This paper investigates the dynamic relationship between terms of trade shocks and the current account in selected small islands developing states. The findings show that the terms of trade explain a significant proportion of the variation in the current account balances. Also, the current account balances reflect a J-curve type reaction to terms of trade innovations. Real output also reacts negatively to changes in the terms of trade.terms of trade shocks, current account balance, panel data, vector autoregression, VAR