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World shocks, world prices, and business cycles: An empirical investigation

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  • Fernández, Andrés
  • Schmitt-Grohé, Stephanie
  • Uribe, Martín

Abstract

SVAR models that include a single world price (such as the terms-of-trade) predict that world shocks explain a small fraction of movements in domestic output (typically less than 10%). This paper presents an empirical framework in which multiple commodity prices transmit world disturbances. Estimates on a panel of 138 countries over the period 1960–2015 indicate that world shocks explain on average 33% of output fluctuations in individual economies. This figure doubles when the model is estimated on post 2000 data. The findings reported here suggest that one-world-price specifications significantly underestimate the importance of world shocks for domestic business cycles.

Suggested Citation

  • Fernández, Andrés & Schmitt-Grohé, Stephanie & Uribe, Martín, 2017. "World shocks, world prices, and business cycles: An empirical investigation," Journal of International Economics, Elsevier, vol. 108(S1), pages 2-14.
    • Handle: RePEc:eee:inecon:v:108:y:2017:i:s1:p:s2-s14
    DOI: 10.1016/j.jinteco.2017.01.001
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    1. 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 101-137, February.
    2. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    3. Uribe, Martín & Schmitt-Grohé, Stephanie, 2015. "How Important Are Terms Of Trade Shocks?," CEPR Discussion Papers 10655, C.E.P.R. Discussion Papers.
    4. Kose, M. Ayhan, 2002. "Explaining business cycles in small open economies: 'How much do world prices matter?'," Journal of International Economics, Elsevier, vol. 56(2), pages 299-327, March.
    5. Jordi Galí & Mark J. Gertler, 2010. "International Dimensions of Monetary Policy," NBER Books, National Bureau of Economic Research, Inc, number gert07-1.
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    More about this item

    Keywords

    World shocks; Commodity prices; Business cycles;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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