How important are commodity terms of trade news shocks for aggregate fluctuations in Canada?

Jamil Sayeed () and Md. Deen Islam ()
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Jamil Sayeed: Employment and Social Development
Md. Deen Islam: University of Dhaka

SN Business & Economics, 2025, vol. 5, issue 11, 1-25

Abstract: Abstract This study assesses the significance of commodity terms of trade news shocks in shaping aggregate fluctuations in Canada. There have been significant fluctuations in commodity prices in the past two decades. As a result, changes in commodity terms of trade can potentially lead to aggregate fluctuations in countries reliant on commodity exports, such as Canada. While prior empirical research has revealed that unexpected variations in commodity terms of trade alone are insufficient in accounting for macroeconomic aggregate movements in small open economies, we posit that the consideration of commodity terms of trade news shocks is crucial in explaining such fluctuations in aggregate variables. Using an alternative version of the maximum forecast error variance approach, we identify a combination of both surprise and news shocks for Canada. Our results show that news-augmented CTOT shocks account for about one-third of output fluctuations and over 60% of investment fluctuations in Canada, more than double the explanatory power of surprise CTOT shocks alone. This highlights that the news component of CTOT movements, rather than the surprise element, is the key driver of Canadian business cycle fluctuations, underscoring the importance of forward-looking expectations in an advanced commodity-exporting economy.

Keywords: Terms of trade; Surprise shocks; News shocks; Aggregate fluctuation; Commodity prices (search for similar items in EconPapers)
JEL-codes: E32 E37 F10 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s43546-025-00959-9

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