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Driving economic fluctuations in Peru: the role of the terms of trade

Gabriel Rodríguez (), Pierina Villanueva Vega () and Paul Castillo Bardalez ()
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Pierina Villanueva Vega: Pontificia Universidad Católica del Perú
Paul Castillo Bardalez: Pontificia Universidad Católica del Perú

Empirical Economics, 2018, vol. 55, issue 3, No 8, 1089-1119

Abstract: Abstract This paper uses a common trend model, following King et al. (Am Econ Rev 81:819–840, 1991), Mellander et al. (J Appl Econ 7(4):369–394, 1992), and Warne (A common trends model: identification, estimation and inference. Seminar Paper 555, Institute for International Economic Studies, Stockholm University, 1993), to evaluate, for 1994–2015, the role of the terms of trade vis-à-vis domestic productivity in explaining macroeconomic fluctuations in Peru. Our results show that Peru’s macroeconomic aggregates share two common trends: an external one, associated with the evolution of the terms of trade; and a domestic one, linked to the evolution of domestic productivity. The external common trend has a larger impact on private investment and public expenditure than on consumption and output, a result consistent with the role of investment in absorbing income volatility. The permanent terms of trade (foreign) shocks account for most of the volatility in output, consumption, private investment, and public expenditure. This result appears more pronounced as the time horizon approaches the long term.

Keywords: Macroeconomic fluctuations; Terms of trade; Permanent and transitory shocks; Domestic and foreign shocks; Small open economy; Common trends; Cointegration (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s00181-017-1318-2

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