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Gustavo Adler and Mr. Nicolas E Magud
We study the history of terms-of-trade booms (during 1970–2012), with a focus on Latin America, through the prisms of a simple metric that quantifies the associated income windfall. We also document saving patterns during these episodes and propose a measure of how much of the income windfall was saved. We find that Latin America‘s terms-of-trade shocks of the last decade have not differed much in magnitude from those observed during the 1970s, but that the associated windfall have been substantially larger. While aggregate saving increased more than in past episodes, the share of the windfall saved (the marginal saving rate) seems to be lower, suggesting that greater aggregate saving reflects mainly the sheer size of the windfall rather than a greater 'effort' to save it. Finally, we find evidence that, while savings during the boom help to increase post-boom income, the composition of such savings matters. Specifically, in past episodes, savings allocated to foreign asset accumulation appear to have contributed more to post-boom income than those devoted to domestic investment.
Gustavo Adler

this time around the positive shock was much larger? This chapter sheds some light on this issue by analyzing the recent episode from a historical perspective. In particular, it examines the income shock associated with the improving terms of trade (dubbed here as the “income windfall”) and the extent to which this income was saved. Although the focus is on Latin America, inter-regional comparisons are drawn when relevant. Other recent studies ( Izquierdo, Romero, and Talvi, 2008 ; Osterholm and Zettelmeyer, 2008 ; Céspedes and Velasco, 2011 ) have looked into

Gustavo Adler and Mr. Nicolas E Magud

terms-of-trade shock has been different, and more prudent, than in past episodes. Whether this is the case, however, remains an open empirical question, that this paper seeks to shed light on. Specifically, we study the current episode—that started around 2002—from a historical perspective, with a focus on the associated terms-of-trade income windfall and the extent to which it has been saved. We focus on Latin America, but draw intra-regional comparisons when relevant. Some recent studies ( IADB, 2008 ; Izquierdo et al, 2008 ; Osterholm and Zettelmeyer, 2008

Gustavo Adler and Mr. Nicolas E Magud

Front Matter Page Western Hemisphere Department Contents Abstract I. Introduction II. The Terms-of-Trade Windfall in Historical Perspective A. A Simple Metric of Terms-of-Trade Income Windfall Methodology Results III. Saving Patterns during the Terms-of-trade Booms A. Average Saving Rates B. Marginal Saving Rates Public and Private Sectors’ Saving Patterns IV. Saving during the Boom and Post-Boom Income V. Concluding Remarks References Tables 1: Key Statistics of Income Windfall 2: Emerging Latin

International Monetary Fund. Western Hemisphere Dept.

On the back of a sizable terms-of-trade boom, Latin America’s fundamentals have improved markedly during the last decade. This has fed a sense of complacency that this time the macroeconomic response has been indeed different. Against this background, we propose a simple metric to quantify the terms-of-trade income windfall of the recent boom, and compare it with previous episodes. We find that while the recent terms-of-trade shock is not much larger than those observed during the 1970s, the associated income windfall has been far greater. Moreover, although