World prices and business cycles in a small open input–output economy

Atef Khelifi

Economic Modelling, 2023, vol. 118, issue C

Abstract: The role of terms-of-trade shocks in driving economic fluctuations is revisited through a multisector small open economy model, where the various types of goods can all be consumed and employed as inputs. Under this assumption, we show that, unlike conventional wisdom, terms-of-trade shocks may not necessarily trigger an economic boom for the exporting country if its export goods are intensively employed or consumed domestically, with limited scope for substitution. We calibrate and estimate the proposed model using data from 15 emerging countries and find that it performs better than the standard model to explain the different impacts of terms-of-trade shocks across countries documented by Schmitt-Groh and Uribe (2018). Such results make the model an excellent new framework to extend the analysis of monetary policies and the effects of price changes.

Keywords: Terms of trade; Business cycles; Microfounded dynamic input–output model; DSGE model (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:118:y:2023:i:c:s0264999322003376

DOI: 10.1016/j.econmod.2022.106100

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