Using an intertemporal model and incorporating wealth effects in consumption and leisure decisions, this paper reexamines the Laursen-Metzler question of the effect of terms of trade changes on employment and current account, with particular emphasis ...
Using an intertemporal model and incorporating wealth effects in consumption and leisure decisions, this paper reexamines the Laursen-Metzler question of the effect of terms of trade changes on employment and current account, with particular emphasis on employment. It does find support for the original Laursen-Metzler result that a (temporary) terms of trade decline increases current employment. However, the mechanism through which this happens is quite different from Laursen-Matzler's own Keynesian mechanism.