This paper examines a stochastic endogenous growth model in which terms-of-trade
uncertainty affects savings and growth. The model explains the well-known positive link
between growth and the mean rate of change of terms of trade, and predicts also that terms-
of-trade variability affects growth. Increased terms-of-trade variability results in faster or
slower growth depending on the degree of risk aversion, but in either case it reduces social
welfare. These growth effects imply that welfare costs of macroeconomic uncertainty are …

This paper examines a neoclassical stochastic endogenous growth model in which terms-of-
trade uncertainty affects savings and consumption growth. The model explains the positive
link between growth and the average rate of change of terms of trade found in recent
empirical studies. In addition, terms-of-trade variability, as an indicator of risk, is found to be
a key determinant of growth. This implies that welfare costs of uncertainty are much larger
than conventional measures of costs of consumption instability. The model's key predictions …