Do Terms of Trade Shocks Drive Business Cycles? Some Evidence from Structural Estimation

Thomas Lubik and Wing Leong Teo

No 377, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: Existing studies differ significantly on how much terms of trade shocks contribute to output fluctuations. Empirical studies based on VAR analysis find that terms of trade shocks explain less than 10% of output fluctuations while results from calibrated DSGE models suggest a figure of more than 50%. In this paper, we set out to bridge the gap between the two approaches by estimating a small scale DSGE model using a loss function based structural Bayesian inference approach. Our approach allows us to exploit cross-equation restrictions implied by the micro-founded structural model to estimate the contribution of terms of trade shocks to output fluctuations. We find that terms of trade shocks explain less than 5% of output fluctuations in our estimated model.

Keywords: Terms of Trade; Business Cycles; Small Open Economies; Structural Estimation; Bayesian Analysis (search for similar items in EconPapers)
JEL-codes: C32 F41 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (8)

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