Terms-of-trade uncertainty and economic growth

This paper examines a stochastic endogenous growth model in which terms-of-trade uncertainty affects savings and growth. The model explains the well-known positive link between growth and the mean rate of change of terms of trade,and predicts also that terms-of-trade variability affects growth. Increased terms-of-trade variability results in faster or slower growth depending on the degree of risk aversion, but in either case it reduces social welfare. These growth effects imply that welfare costs of macroeconomic uncertainty are much larger than first thought. Cross-country panel regressions provide strong support for the model's key predictions. (C) 1997 Elsevier Science B.V.