Are Terms of Trade Rises Inflationary?
AbstractThis article explores the relationship between the terms of trade and inflation. It shows, both analytically and empirically, that the exchange rate response to a change in the terms of trade is crucial to the inflation outcome. It demonstrates the existence of a 'threshold' exchange rate response. Our best estimate is that a rise in the terms of trade is inflationary if the associated rise in the real exchange rate is less than about 1/3-1/2 of the rise in the terms of trade. However, if appreciation of the real exchange rate is larger than this, the consequent fall in the domestic price of importables is large enough that the terms of trade rise reduces inflation, at least in the short run. Copyright 1996 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.
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Bibliographic InfoArticle provided by The University of Melbourne, Melbourne Institute of Applied Economic and Social Research in its journal Australian Economic Review.
Volume (Year): 29 (1996)
Issue (Month): 2 ()
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- Christian Broda, 2002. "Terms of trade and exchange rate regimes in developing countries," Staff Reports 148, Federal Reserve Bank of New York.
- Donyina-Ameyaw, Samuel, 2004. "A Small Macroeconmetric Model Of Trade And Inflation In Ghana," The Warwick Economics Research Paper Series (TWERPS) 696, University of Warwick, Department of Economics.
- Gruen, David & Pagan, Adrian & Thompson, Christopher, 1999.
"The Phillips curve in Australia,"
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- Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the determinants of inflation in Australia," BIS Papers chapters, in: Bank for International Settlements (ed.), Empirical studies of structural changes and inflation, volume 3, pages 1-28 Bank for International Settlements.
- Valadkhani, Abbas & Layton, Allan P. & Karunaratne, Neil D., 2005. "Export Price Volatility in Australia: An Application of ARCH and GARCH Models," Economics Working Papers wp05-11, School of Economics, University of Wollongong, NSW, Australia.
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