Terms-of-Trade Shocks are Not All Alike

Abstract

Terms of trade are an inaccurate empirical proxy for how fluctuations in international prices affect the economy. To capture the relevance of terms of trade fluctuations for the domestic business cycle, the role of export and import prices needs to be analyzed separately. Using a sample of developing economies, we find that the economy’s response to a positive export price shock does not mirror the response to a negative import price shock. (JEL E23, E32, E43, F14, F44, O11)

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