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What Can Account for Fluctuations in the Terms of Trade?

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  • Marianne Baxter

    () (Institute for Economic Development, Boston University)

  • Michael A. Kouparitsas

    (Federal Reserve Bank of Chicago)

Abstract

This paper studies the sources of terms of trade volatility. We decompose the terms of trade into two components. The 'goods price' component stems from differences in the composition of import and export baskets, while the 'country price' component stems from deviations from the law of one price. Countries are classified according to their major import and export goods: commodities, manufactured goods and fuels. Except fuel exporters, there is roughly equal importance of goods price vs country price volatility. These results suggest that there may be a role for reducing terms of trade volatility through diversification of a country's exports. Copyright 2006 Blackwell Publishing Ltd.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - The Institute for Economic Development Working Papers Series with number dp-112.

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Length: 27 pages
Date of creation: Dec 2000
Date of revision:
Handle: RePEc:bos:iedwpr:dp-112

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Keywords: Terms of Trade; International business cycles;

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References

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  1. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  2. David K. Backus & Mario J. Crucini, 1998. "Oil Prices and the Terms of Trade," NBER Working Papers 6697, National Bureau of Economic Research, Inc.
  3. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  4. Rogers, John H. & Jenkins, Michael, 1995. "Haircuts or hysteresis? Sources of movements in real exchange rates," Journal of International Economics, Elsevier, vol. 38(3-4), pages 339-360, May.
  5. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
  6. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
  7. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
  8. Knetter, Michael M, 1993. "International Comparisons of Price-to-Market Behavior," American Economic Review, American Economic Association, vol. 83(3), pages 473-86, June.
  9. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  10. Kim, In-Moo & Loungani, Prakash, 1992. "The role of energy in real business cycle models," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 173-189, April.
  11. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  12. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Citations

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Cited by:
  1. Margaret S. McMillan & Alix Peterson Zwane & Nava Ashraf, 2007. "My Policies or Yours: Does OECD Support for Agriculture Increase Poverty in Developing Countries?," NBER Chapters, in: Globalization and Poverty, pages 183-240 National Bureau of Economic Research, Inc.
  2. Josef Loening & Masato Higashi, 2011. "Decomposing terms of trade fluctuations in Ethiopia," Applied Economics Letters, Taylor and Francis Journals, vol. 18(13), pages 1219-1224.
  3. Chowdhury, Abdur R., 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," BOFIT Discussion Papers 3/2003, Bank of Finland, Institute for Economies in Transition.
  4. Abdur R. Chowdhury, 2003. "Private Savings In Transition Economies: Are There Terms Of Trade Shocks?," William Davidson Institute Working Papers Series 2003-572, William Davidson Institute at the University of Michigan.
  5. Konstantin M. Wacker, 2011. "Do multinationals beat down developing countries' export prices? The impact of FDI on net barter terms of trade," Ibero America Institute for Econ. Research (IAI) Discussion Papers 211, Ibero-America Institute for Economic Research.
  6. Christopher Bowdler & Adeel Malik, 2005. "Openness and inflation volatility: cross-country evidence," CSAE Working Paper Series 2005-08, Centre for the Study of African Economies, University of Oxford.
  7. Konstantin M. Wacker, 2011. "The Impact of Foreign Direct Investment on Developing Countries’ Terms of Trade," Working Papers UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).
  8. Michael A. Koupatrisas, 2001. "Evidence of the North--South business cycle," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 46-59.
  9. Malik, Adeel & Temple, Jonathan, 2006. "The Geography of Output Volatility," CEPR Discussion Papers 5516, C.E.P.R. Discussion Papers.
  10. Maurizio Michael Habib & Margarita Manolova Kalamova, 2007. "Are there oil currencies? The real exchange rate of oil exporting countries," Working Paper Series 839, European Central Bank.
  11. Fátima Cardoso & Paulo Soares Esteves, 2008. "What is behind the recent evolution of Portuguese terms of trade?," Working Papers w200805, Banco de Portugal, Economics and Research Department.
  12. Paulo Soares Esteves & Fátima Cardoso, 2008. "Globalisation, Structural Changes in Exports and the Portuguese Terms of Trade," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  13. Bems, Rudolfs & de Carvalho Filho, Irineu, 2011. "The current account and precautionary savings for exporters of exhaustible resources," Journal of International Economics, Elsevier, vol. 84(1), pages 48-64, May.
  14. Calderon, Cesar & Kubota, Megumi, 2009. "Does higher openness cause more real exchange rate volatility ?," Policy Research Working Paper Series 4896, The World Bank.
  15. Irineu E. Carvalho Filho & Rudolfs Bems, 2009. "Exchange Rate Assessments: Methodologies for Oil Exporting Countries," IMF Working Papers 09/281, International Monetary Fund.
  16. Abdur R. Chowdhury, 2003. "Do asymmetric terms of trade shocks affect private savings in a transition economy?," Macroeconomics 0303006, EconWPA.

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