Abstract:
According to the Harberger-Laursen-Metzler (HLM) effect, an exogenous
temporary increase in the terms of trade leads to an improvement in the current
account balance. This paper uses a recursive vector autoregression to investigate
empirically the existence of the HLM effect in Pakistan, using a time series dataset
for the period 1980–2009. Two important results emerge. First, real income
deteriorates with an improvement in the terms of trade. Second, the current
account balance also responds negatively to innovations in the terms of trade,
which implies that the HLM effect does not exist in Pakistan.
