Dissecting the Effects of Terms of Trade Shocks on the Korean Economy

Jinho Choi, Joonyoung Hur and Manho Kang

Emerging Markets Finance and Trade, 2017, vol. 53, issue 5, 1199-1216

Abstract: Micro- as well as macro-level analyses on the terms of trade (TOT) for Korea are conducted. We demonstrate that the deteriorated TOT since the mid-1990s are largely attributable to declines in export prices of manufacturing goods and surges in energy import prices. A further investigation using a vector autoregressive (VAR) model identified by sign restrictions on impulse responses suggests that the structural innovation that reduces export prices and increases import prices is the most significant driver of the TOT fluctuations in Korea. Although the shock deteriorates the TOT, it is clearly associated with an expansionary effect on output, which is more pronounced at longer horizons.

Date: 2017
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DOI: 10.1080/1540496X.2016.1174686

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