Terms of Trade Shocks and Economic Performance Under Different Exchange Rate Regimes

Ahmad Hassan Ahmad and Eric Pentecost

Discussion Paper Series from Department of Economics, Loughborough University

Abstract: The impact of terms of trade shocks on a country’s output and price level are, according to economic theory, expected to vary according to the de facto exchange rate regime. This paper tests this hypothesis how terms of trade shocks impact on 22 African countries, which operate different de facto exchange rate regimes, using a structural VAR with long-run restrictions, over the period from 1980 to 2007. The empirical findings support the view that the exchange rate regime matters as to how countries respond to exogenous external shocks like terms of trade shocks, in that output variation is greater for countries with fixed regimes, while for flexible regime countries real exchange rate variation reduces the need for output variability.

Keywords: Terms of Trade; Exchange Rate Regimes; Structural VARs (search for similar items in EconPapers)
JEL-codes: F13 F31 F41 (search for similar items in EconPapers)
Date: 2010-03, Revised 2010-03
New Economics Papers: this item is included in nep-afr, nep-cba, nep-ifn, nep-mon and nep-opm
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Citations: View citations in EconPapers (3)

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