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Terms of Trade and Output Fluctuations in Colombia

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  • Gonzalo Hernández

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    (University of Massachusetts Amherst)

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    Abstract

    This paper explores the importance of the terms of trade to explain output fluctuations in Colombia, a developing country where almost 60% of the exports correspond to four commodities: oil (32%), coal (17%), coffee (5%) and nickel (2%), and where 80% of its imports are intermediate and capital goods. This research is motivated fundamentally by the particular importance of short run fluctuations in developing economies, the fact that the Colombian terms of trade are procyclical and the current debate in Colombia about eventual economic policies toward sterilization of the effects of changes in commodities prices in a context of an appreciation of the nominal exchange rate. The study includes a time series analysis, for the period 1994-2009 with quarterly data, which follows the Box-Jenkins methodology for an ARMAX model. I find robust evidence that indicates that the quarterly growth of GDP is positively and significantly affected by variations in the terms of trade, which explain 1/3 of GDP growth variability. This result is consistent with the possible outcome of the three-goods model for an open small economy in which the terms of trade can be the source of the aggregate output fluctuations. JEL Categories:

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    Bibliographic Info

    Paper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2011-04.

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    Date of creation: Feb 2011
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    Handle: RePEc:ums:papers:2011-04

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    1. Lavan Mahadeva & Javier Gómez Pineda, 2009. "The international cycle and Colombian monetary policy," BORRADORES DE ECONOMIA 005406, BANCO DE LA REPÚBLICA.
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    12. Juan Carlos Parra Alvarez, 2008. "Hechos Estilizados de la Economía Colombiana:Fundamentos Empíricos para la Construcción y Evaluación de un Modelo DSGE," BORRADORES DE ECONOMIA 004602, BANCO DE LA REPÚBLICA.
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    15. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, World Bank Group, vol. 14(2), pages 251-85, May.
    16. Hoffmaister, Alexander W. & Roldos, Jorge E., 2001. "The Sources of Macroeconomic Fluctuations in Developing Countries: Brazil and Korea," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 213-239, April.
    17. Paul Cashin & Christopher J. Kent, 2003. "The Response of the Current Account to Terms of Trade Shocks," IMF Working Papers 03/143, International Monetary Fund.
    18. Ahmed, Shaghil, 2003. "Sources of economic fluctuations in Latin America and implications for choice of exchange rate regimes," Journal of Development Economics, Elsevier, vol. 72(1), pages 181-202, October.
    19. Mendoza, Enrique G, 1995. "The Terms of Trade, the Real Exchange Rate, and Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(1), pages 101-37, February.
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