Four decades of terms-of-trade booms: A metric of income windfall

• Measure of terms-of-trade exogenous income shock (‘income windfall’), 1970–2012.
• Latin America's terms-of-trade shock of the last decade similar to the 1970s.
• Associated income windfall, however, has been substantially larger.
• Aggregate saving is larger than in past episodes but share of the windfall is lower.

We study Latin America's history of terms-of-trade booms during the period 1970–2012 through the prisms of a metric that quantifies the associated exogenous income shock (‘income windfall’). We also document saving patterns during these episodes and propose a measure of how much of the income windfall was saved (i.e., the marginal saving rate). We find that Latin America's terms-of-trade shock of the last decade has not differed much in magnitude from that observed during the 1970s, but the associated income windfall has been substantially larger. While aggregate saving increased more than in past episodes, the share of the windfall saved has been lower, suggesting that greater aggregate savings reflect mainly the sheer size of the exogenous income shock rather than a greater effort to save it.