How Important Are Terms Of Trade Shocks?

Stephanie Schmitt‐Grohé · Martı́n Uribe

39 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Economic Theory and Policy

Abstract

According to conventional wisdom, terms of trade shocks represent a major source of business cycles in emerging and poor countries.This view is largely based on the analysis of calibrated business-cycle models.We argue that the view that emerges from empirical SVAR models is strikingly different.We estimate country-specific SVARs using data from 38 emerging and countries and find that terms-of-trade shocks explain less than 10 percent of movements in aggregate activity.We then build a three-sector open economy model and estimate key structural parameters country by country.We find that at the country level there is a disconnect between the empirical and theoretical models in the importance assigned to terms-of-trade shocks.

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References

2002Closing Small Open Economy Models 1991Real Business Cycles in a Small Open Economy 1995The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations 2011Risk Matters: The Real Effects of Volatility Shocks 2008International Risk Sharing and the Transmission of Productivity Shocks 2003Terms of trade and exchange rate regimes in developing countries 2002Explaining business cycles in small open economies 2003Country Spreads and Emerging Countries: Who Drives Whom?

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