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Are Terms of Trade Rises Inflationary?

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Author Info
David Gruen (Reserve Bank of Australia)
Jacqueline Dwyer (Reserve Bank of Australia)
Abstract

This paper 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 suggests the existence of a 'threshold' exchange rate response. Our best estimate is that (other things being equal) 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.

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Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9508.

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Date of creation: Nov 1995
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Handle: RePEc:rba:rbardp:rdp9508

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Pitchford, J D, 1986. "The Australian Economy: 1985 and Prospects for 1986," The Economic Record, The Economic Society of Australia, vol. 62(176), pages 1-21, March.
  2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December. [Downloadable!] (restricted)
  3. Jacqueline Dwyer & Christopher Kent & Andrew Pease, 1993. "Exchange Rate Pass-through: The Different Responses of Importers and Exporters," RBA Research Discussion Papers rdp9304, Reserve Bank of Australia. [Downloadable!]
  4. David Gruen & Geoffrey Shuetrim, 1994. "Internationalisation and the Macroeconomy," RBA Annual Conference Volume, in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia. [Downloadable!]
  5. Neary, J Peter, 1987. "Determinants of the Equilibrium Real Exchange Rate," CEPR Discussion Papers 209, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Teal, F., 1990. "General Equilibrium Models, Australian'S Terms Of Trade And The Real Exchange Rate: 1970-1989," Discussion Papers 235, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University.
  7. Adrian Blundell-Wignall & Robert G. Gregory, 1990. "Exchange Rate Policy in Advanced Commodity-Exporting Countries: The Case of Australia and New Zealand," OECD Economics Department Working Papers 83, OECD Economics Department. [Downloadable!]
  8. Dwyer, Jacqueline, 1992. "The Tradeable Non-tradeable Dichotomy: A Practical Approach," Australian Economic Papers, Blackwell Publishing, vol. 31(59), pages 443-59, December.
  9. Jacqueline Dwyer & Ricky Lam, 1994. "Explaining Import Price Inflation: A Recent History of Second Stage Pass-through," RBA Research Discussion Papers rdp9407, Reserve Bank of Australia. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jacqueline Dwyer & Kenneth Leong, 2001. "Changes in the Determinants of Inflation in Australia," RBA Research Discussion Papers rdp2001-02, Reserve Bank of Australia. [Downloadable!]
  2. Christian Broda, 2002. "Terms of trade and exchange rate regimes in developing countries," Staff Reports 148, Federal Reserve Bank of New York. [Downloadable!]
  3. Christopher Kent & Philip Lowe, 1997. "Asset-price Bubbles and Monetary Policy," RBA Research Discussion Papers rdp9709, Reserve Bank of Australia. [Downloadable!]
  4. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia. [Downloadable!]
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