Terms-of-Trade Shocks are Not all Alike

When analyzing terms-of-trade shocks, it is implicitly assumed that the economy responds symmetrically to changes in export and import prices. We show that this is not the case: the effects of a positive export price shock do not mirror the effects of a negative import price shock. For our analysis, we construct a dataset of export and import price indices by matching commodity and manufacturing price data with trade shares for a sample of developing countries. We identify export price, import price, and global economic activity shocks using sign and narrative restrictions. Taken together, export and import price shocks account for around 30 percent of output fluctuations but export price shocks are more important than import price shocks for domestic business cycles. Global economic activity shocks, which simultaneously affect export and import prices, are largely undetected in the terms-of-trade measure but have large effects on domestic business cycles. We link our results to existing small open economy models used to study the transmission of terms-of-trade shocks.