Terms of trade shocks and the current account in small island developing states

Abstract

The paper investigates the dynamic relationship between external and internal shocks and the current account in selected small island developing states. External shocks, defined as terms of trade fluctuations, explain a significant proportion of the variation in the current account balances. The external shocks have a temporary negative impact on the current account balances with a subsequent improvement, generating a J-curve type reaction. In contrast, real output shocks have a positive and significant effect on the current account.