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Terms of Trade Shocks and Economic Performance Under Different Exchange Rate Regimes

The impact of terms of trade shocks on a country’s output and price level are, according to economic theory, expected to vary according to the de facto exchange rate regime. This paper tests this hypothesis how terms of trade shocks impact on 22 African countries, which operate different de facto exchange rate regimes, using a structural VAR with long-run restrictions, over the period from 1980 to 2007. The empirical findings support the view that the exchange rate regime matters as to how countries respond to exogenous external shocks like terms of trade shocks, in that output variation is greater for countries with fixed regimes, while for flexible regime countries real exchange rate variation reduces the need for output variability.

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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2010_08.

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Date of creation: Mar 2010
Date of revision: Mar 2010
Handle: RePEc:lbo:lbowps:2010_08
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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  3. Alexander W. Hoffmaister & Jorge E. Roldós & Peter Wickham, 1998. "Macroeconomic Fluctuations in Sub-Saharan Africa," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 132-160, March.
  4. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2008. "Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory?," NBER Working Papers 14430, National Bureau of Economic Research, Inc.
  5. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
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  7. Bleaney, Michael & Fielding, David, 2002. "Exchange rate regimes, inflation and output volatility in developing countries," Journal of Development Economics, Elsevier, vol. 68(1), pages 233-245, June.
  8. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May.
  9. Cashin, Paul & McDermott, C. John & Pattillo, Catherine, 2004. "Terms of trade shocks in Africa: are they short-lived or long-lived?," Journal of Development Economics, Elsevier, vol. 73(2), pages 727-744, April.
  10. Serven, Luis & Frankel, Jeffrey & Fajnzylber, Eduardo & Schmukler, Sergio, 2000. "Verifying exchange rate regimes," Policy Research Working Paper Series 2397, The World Bank.
  11. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, 03.
  12. Broda, Christian, 2004. "Terms of trade and exchange rate regimes in developing countries," Journal of International Economics, Elsevier, vol. 63(1), pages 31-58, May.
  13. Christian Broda, 2001. "Coping with Terms-of-Trade Shocks: Pegs versus Floats," American Economic Review, American Economic Association, vol. 91(2), pages 376-380, May.
  14. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  15. A. H. Ahmad & Eric J. Pentecost, 2010. "Terms of Trade Shocks and Economic Performance Under Different Exchange Rate Regimes," Discussion Paper Series 2010_08, Department of Economics, Loughborough University, revised Mar 2010.
  16. Bleaney, Michael & Greenaway, David, 2001. "The impact of terms of trade and real exchange rate volatility on investment and growth in sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 65(2), pages 491-500, August.
  17. W. E. G. Salter, 1959. "Internal And External Balance: The Role Op Price And Expenditure Effects," The Economic Record, The Economic Society of Australia, vol. 35(71), pages 226-238, 08.
  18. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
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