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What can account for fluctuations in the terms of trade?

  • Marianne Baxter
  • Michael A. Kouparitsas

Fluctuations in the terms of trade the price of a country’s exports relative to the price of its imports are a source of perennial concern to policymakers in developing countries and industrialized nations alike. Terms of trade growth is extremely volatile and can lead to sudden changes in a country’s economic health. This paper seeks to understand the sources of fluctuations in the terms of trade. We decompose a country’s terms of trade volatility into a component stemming from differences in the composition of import baskets and export baskets, which we define as a goods price effect, and a component due to cross-country differences in the price of a particular class of goods, which we call a country price effect. We ask whether the decomposition depends in a clear way on country characteristics-developed vs. less-developed; exporter of manufactured goods vs. exporter of fuels or other commodities? Our goal in this paper is twofold. First, we provide new evidence on the sources of terms of trade volatility that should be of use to policymakers, Seconds, the stylized facts that emerge from this analysis will provide guidance for economists seeking to build better models of interdependent economies.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-00-25.

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Date of creation: 2000
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Handle: RePEc:fip:fedhwp:wp-00-25
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  1. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
  2. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
  3. David Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Dynamics of the Trade Balance and the Terms of Trade: The S-Curve," NBER Working Papers 4242, National Bureau of Economic Research, Inc.
  4. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
  5. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  6. Rogers, J.H. & Jenkins, M.A., 1993. "Haircuts or Hysteresis? Sources of Movements in Real Exchange Rates," Papers 4-93-6, Pennsylvania State - Department of Economics.
  7. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-85, March.
  8. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February.
  9. Kim, In-Moo & Loungani, Prakash, 1992. "The role of energy in real business cycle models," Journal of Monetary Economics, Elsevier, vol. 29(2), pages 173-189, April.
  10. Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
  11. Michael A. Kouparitsas, 1996. "North-South business cycles," Working Paper Series, Macroeconomic Issues WP-96-9, Federal Reserve Bank of Chicago.
  12. Knetter, Michael M, 1993. "International Comparisons of Price-to-Market Behavior," American Economic Review, American Economic Association, vol. 83(3), pages 473-86, June.
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