Are Terms of Trade Rises Inflationary?
This article 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 demonstrates the existence of a 'threshold' exchange rate response. Our best estimate is that 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. Copyright 1996 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.
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Volume (Year): 29 (1996)
Issue (Month): 2 ()
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References listed on IDEAS
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- Sebastian Edwards & Sweder van Wijnbergen, 1987.
"Tariffs, the Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics,"
NBER Working Papers
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- 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.
- 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 Publishing.
- Dwyer, Jacqueline, 1992. "The Tradeable Non-tradeable Dichotomy: A Practical Approach," Australian Economic Papers, Wiley Blackwell, vol. 31(59), pages 443-59, December.
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