Export diversification and international debt under terms-of-trade uncertainty

Abstract

This paper proposes an intertemporal approach to export diversification in developing countries facing uncertain terms-of-trade. By incorporating international debt, by far the predominant source of LDC external financing today, the model provides a richer and more realistic framework than static models with no financial markets or models emphasizing international trade in equities. The approach is applied to a small developing country with a comparative advantage in a risky commodity to illustrate explicitly the relation between intertemporal substitution in consumption and diversification in production.

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