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Terms of Trade Shocks and Economic Performance Under Different Exchange Rate Regimes

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  • A. H. Ahmad

    ()
    (Dept of Economics, Loughborough University)

  • Eric J. Pentecost

    ()
    (Dept of Economics, Loughborough University)

Abstract

The impact of terms of trade shocks on a country’s output and price level are, according to economic theory, expected to vary according to the de facto exchange rate regime. This paper tests this hypothesis how terms of trade shocks impact on 22 African countries, which operate different de facto exchange rate regimes, using a structural VAR with long-run restrictions, over the period from 1980 to 2007. The empirical findings support the view that the exchange rate regime matters as to how countries respond to exogenous external shocks like terms of trade shocks, in that output variation is greater for countries with fixed regimes, while for flexible regime countries real exchange rate variation reduces the need for output variability.

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Bibliographic Info

Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2010_08.

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Date of creation: Mar 2010
Date of revision: Mar 2010
Handle: RePEc:lbo:lbowps:2010_08

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Keywords: Terms of Trade; Exchange Rate Regimes; Structural VARs;

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References

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  1. Bleaney, Michael & Fielding, David, 2002. "Exchange rate regimes, inflation and output volatility in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 68(1), pages 233-245, June.
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  7. Cashin, Paul & McDermott, C. John & Pattillo, Catherine, 2004. "Terms of trade shocks in Africa: are they short-lived or long-lived?," Journal of Development Economics, Elsevier, Elsevier, vol. 73(2), pages 727-744, April.
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Cited by:
  1. Erick Lahura & Marco Vega, 2013. "Regímenes cambiarios y desempeño macroeconómico: una evaluación de la literatura," Documentos de Trabajo, Departamento de Economía - Pontificia Universidad Católica del Perú 2013-361, Departamento de Economía - Pontificia Universidad Católica del Perú.

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