Anticipated versus unanticipated terms of trade shocks and the J-curve phenomenon

Syed Ali and Sajid Anwar

Journal of International Money and Finance, 2018, vol. 81, issue C, 1-19

Abstract: Using a dynamic stochastic general equilibrium (DSGE) model, we examine the impact of anticipated and unanticipated terms of trade (ToT) shocks on aggregate output, inflation and the trade balance (TB). This allows us to offer an alternative explanation of the J-curve phenomenon. We find that an unanticipated ToT shock increases real output as well as inflation but the J-curve phenomenon may not exist under a certain condition. However, under the same condition, an anticipated ToT shock leads to the J-curve effect. We find that our main result, concerning the J-curve phenomenon, continues to hold even if the assumption of rational expectations about the ToT is relaxed. Further analysis reveals that the presence of a cost channel of monetary policy increases the intensity of the J-curve effect. Assuming plausible parameter values, while using a more general model, calibration results support our theoretical predictions.

Keywords: J-Curve; Exchange rate; Terms of trade effect; DSGE models; Cost channel of monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E41 E52 F41 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:81:y:2018:i:c:p:1-19

DOI: 10.1016/j.jimonfin.2017.10.003

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