How Important Are Terms of Trade Shocks

Stephanie Schmitt-Grohe and Martín Uribe ()

No 1700, 2016 Meeting Papers from Society for Economic Dynamics

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 SVAR models is strikingly different. We estimate country-specific SVARs us- ing data from 38 poor and emerging countries and find that terms-of-trade shocks ex- plain only 10 percent of movements in aggregate activity. We then build a fully-fledged, open economy model with three sectors, importables, exportables, and nontradables, and use data from each of the 38 countries to obtain country-specific estimates of key structural parameters, including those defining the terms-of-trade process. In the es- timated theoretical business-cycle models terms-of-trade shocks explain on average 30 percent of the variance of key macroeconomic indicators, three times as much as in SVAR models.

Date: 2016
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Related works:
Working Paper: How Important Are Terms Of Trade Shocks? (2015)
Working Paper: How Important Are Terms Of Trade Shocks? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1700

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