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What can account for fluctuations in the terms of trade?

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  • Marianne Baxter
  • Michael A. Kouparitsas

Abstract

Fluctuations in the terms of trade the price of a country’s exports relative to the price of its imports are a source of perennial concern to policymakers in developing countries and industrialized nations alike. Terms of trade growth is extremely volatile and can lead to sudden changes in a country’s economic health. This paper seeks to understand the sources of fluctuations in the terms of trade. We decompose a country’s terms of trade volatility into a component stemming from differences in the composition of import baskets and export baskets, which we define as a goods price effect, and a component due to cross-country differences in the price of a particular class of goods, which we call a country price effect. We ask whether the decomposition depends in a clear way on country characteristics-developed vs. less-developed; exporter of manufactured goods vs. exporter of fuels or other commodities? Our goal in this paper is twofold. First, we provide new evidence on the sources of terms of trade volatility that should be of use to policymakers, Seconds, the stylized facts that emerge from this analysis will provide guidance for economists seeking to build better models of interdependent economies.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-00-25.

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Date of creation: 2000
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Handle: RePEc:fip:fedhwp:wp-00-25

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Keywords: Trade ; Business cycles;

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  1. In-Moo Kim & Prakash Loungani, 1991. "The role of energy in real business cycle models," Working Paper Series, Macroeconomic Issues 91-6, Federal Reserve Bank of Chicago.
  2. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the S-curve," Working Paper 9211, Federal Reserve Bank of Cleveland.
  3. Engel, Charles & Rogers, John H, 1996. "How Wide Is the Border?," American Economic Review, American Economic Association, vol. 86(5), pages 1112-25, December.
  4. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  5. 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.
  6. David K. Backus & Mario J. Crucini, 1998. "Oil Prices and the Terms of Trade," NBER Working Papers 6697, National Bureau of Economic Research, Inc.
  7. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
  8. Charles Engel, 1994. "Real Exchange Rates and Relative Prices: An Empirical Investigation," NBER Working Papers 4231, National Bureau of Economic Research, Inc.
  9. 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.
  10. Rogers, J.H. & Jenkins, M.A., 1993. "Haircuts or Hysteresis? Sources of Movements in Real Exchange Rates," Papers 4-93-6, Pennsylvania State - Department of Economics.
  11. Knetter, Michael M, 1993. "International Comparisons of Price-to-Market Behavior," American Economic Review, American Economic Association, vol. 83(3), pages 473-86, June.
  12. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
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