Current account, productivity and terms of trade shocks in Norway

Abstract

Economic theory suggests that a permanent rise in terms of trade should result in a permanent rise in the standard of living. The increase comes from a permanent rise in productivity following an efficient reallocation of resources in a frictionless economy. This article presents Norway as a counterexample using three-variable Structural Vector Moving Average (SVMA) with long-run restrictions. The results show that permanent shocks to terms of trade improve the current account and have almost no effect on the output per capita growth. An over-identification test that restricts the permanent shocks to terms of trade to have only temporary effects on output per capita growth cannot be rejected as well. Overall, those shocks that have permanent effects on terms of trade or output per capita growth do not have permanent effects on each other. The empirical evidence suggests that strong intersectoral rigidities to reallocation of resources are present in Norway.

Keywords:

• current account balance
• terms of trade
• SVMA

JEL Classification:

• C32
• F19
• F32

Notes

¹Consistent with Obstfeld and Rogoff (1994) and Backus and Crucini (2000).

²Both articles employ output growth.

³The inclusion of the small open-economy restrictions determines an over-identified system. For Canada and the United Kingdom, Kano (2008) compares two specifications: (1) including three long-run restrictions; and (2) including two impact restrictions and one long-run restriction. He finds no differences in results between both specifications.