The Terms of Trade and Economic Fluctuations

Enrique Mendoza

No 1992/098, IMF Working Papers from International Monetary Fund

Abstract: A three-good, stochastic intertemporal equilibrium model of a small open economy is used to examine the link between terms of trade and business cycles. Equilibrium co-movements of model economies representing industrial and developing countries are computed and compared with the stylized facts of 30 countries. The results show that terms-of-trade shocks account for half of observed output variability and that the model mimics the Harberger-Laursen-Metzler effect and produces large deviations from purchasing power parity. The elasticity of substitution between tradable and nontradable goods and the persistence of the shocks play a key role in producing these results.

Keywords: WP; standard deviation; real GDP; U.S. dollar; terms-of-trade shock; terms-of-trade disturbance; form terms of trade; open economy; terms-of-trade effect; Terms of trade; Trade balance; Consumption; Business cycles; Import prices; Western Hemisphere; Middle East; Africa; Asia and Pacific (search for similar items in EconPapers)
Pages: 72
Date: 1992-11-01
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1992/098

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