HOW IMPORTANT ARE TERMS†OF†TRADE SHOCKS?

Stephanie Schmitt†Grohé and Martín Uribe

International Economic Review, 2018, vol. 59, issue 1, 85-111

Abstract: According to conventional wisdom, terms†of†trade shocks represent a major source of business cycles in emerging and poor countries. This view is largely based on the analysis of calibrated business†cycle models. We argue that the view that emerges from empirical structural vector autoregression (SVAR) models is strikingly different. We estimate country†specific SVARs using data from 38 countries and find that terms†of†trade shocks explain less than 10% of movements in aggregate activity. We then estimate key structural parameters of a three†sector business†cycle model country by country and find a disconnect between the importance assigned to terms†of†trade shocks by theoretical and SVAR models.

Date: 2018
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