Identifying terms of trade shocks in a developing country using a sign restrictions approach

Kagiso Mangadi and Jeffrey Sheen

Applied Economics, 2017, vol. 49, issue 24, 2298-2315

Abstract: Using annual data for Botswana from 1960 to 2012, we examine the responses of macroeconomic variables to four generalized positive terms of trade shocks – global demand, globalizing, sector-specific and global supply. A sign-restricted structural vector autoregression model with a penalty function is estimated to identify the four possible shocks. While positive global demand and globalization shocks are both expansionary, they have opposite effects on inflation. A positive commodity market specific shock dampens real GDP growth and is inflationary, suggesting a possible Dutch disease response. A negative global supply shock suppresses both output growth and inflation. All but the last shock leads to a significant declining interest rate. Monetary policy contraction is recommended for the first shock and expansion for the others.

Date: 2017
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DOI: 10.1080/00036846.2016.1237757

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