How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets

Luis-Gonzalo Llosa

No 7, Working Papers from Peruvian Economic Association

Abstract: This paper analyzes how terms of trade affect aggregate productivity using a two-country monopolistic competitive business cycle model driven by aggregate technology shocks. The inefficiency of the equilibrium implies that each country’s productivity is affected by the terms of trade. This introduces a novel mechanism for business cycle synchronization. Moreover, for each country, foreign technology shocks have almost the same effects as domestic technology shocks. The paper also shows how terms of trade movements can lead to excess volatility of consumption and highly persistent productivity. On the quantitative side, the model delivers a degree of business cycle synchronization that is close to the actual comovement of the U.S. economy with the rest of the world. The model also implies that for some small open economies, specially emerging economies, foreign shocks can outperform domestic shocks in explaining their business cycles. Finally, the paper provides a quantification of the influence of the terms of trade on emerging countries’ productivity and finds that it can be large.

Keywords: Imperfect Competition; Input-Output Linkages; Terms of Trade; Business Cycles; Total Factor Productivity (search for similar items in EconPapers)
JEL-codes: C67 E23 F12 F41 F43 (search for similar items in EconPapers)
Date: 2014-02
New Economics Papers: this item is included in nep-dge, nep-eff, nep-int, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:apc:wpaper:2014-007

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