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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.

Suggested Citation

  • 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.
  • Handle: RePEc:lbo:lbowps:2010_08

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    References listed on IDEAS

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    14. 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.
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    Cited by:

    1. Lahura, Erick & Vega, Marco, 2013. "Regímenes cambiarios y desempeño macroeconómico: Una evaluación de la literatura," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 26, pages 101-119.

    More about this item


    Terms of Trade; Exchange Rate Regimes; Structural VARs;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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