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World Shocks, World Prices, and Business Cycles: An Empirical Investigation

Author

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  • Andrés Fernández
  • Stephanie Schmitt-Grohé
  • Martín Uribe

Abstract

Most existing studies of the macroeconomic effects of global shocks assume that they are mediated by a single intratemporal relative price such as the terms of trade and possibly an intertemporal price such as the world interest rate. This paper presents an empirical framework in which multiple commodity prices and the world interest rate transmit world disturbances. Estimates on a panel of 138 countries over the period 1960-2015 indicate that world shocks explain on average 33 percent of aggregate fluctuations in individual economies. This figure doubles when the model is estimated on post 2000 data. The increase is attributable mainly to a change in the domestic transmission mechanism as opposed to changes in the world commodity price process as argued in the literature on the financialization of world commodity markets.

Suggested Citation

  • Andrés Fernández & Stephanie Schmitt-Grohé & Martín Uribe, 2016. "World Shocks, World Prices, and Business Cycles: An Empirical Investigation," NBER Working Papers 22833, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22833
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    References listed on IDEAS

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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. 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.
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    Cited by:

    1. Hakon Tretvoll & Fernando Leibovici & David Kohn, 2017. "Trade in Commodities and Emerging Market Business Cycles," 2017 Meeting Papers 743, Society for Economic Dynamics.
    2. Markus Eberhardt & Andrea F Presbitero, 2018. "Commodity Price Movements and Banking Crises," IMF Working Papers 18/153, International Monetary Fund.
    3. Fernandez, Andres & Imrohoroglu, Ayse & Tamayo, Cesar, 2017. "Saving Rates in Latin America: A Neoclassical Perspective," IDB Publications (Working Papers) 8706, Inter-American Development Bank.
    4. Drechsel, Thomas & Tenreyro, Silvana, 2018. "Commodity booms and busts in emerging economies," Journal of International Economics, Elsevier, vol. 112(C), pages 200-218.
    5. Fernández, Andrés & González, Andrés & Rodríguez, Diego, 2018. "Sharing a ride on the commodities roller coaster: Common factors in business cycles of emerging economies," Journal of International Economics, Elsevier, vol. 111(C), pages 99-121.
    6. Vadym Lepetyuk & Lilia Maliar & Serguei Maliar, 2017. "Should Central Banks Worry About Nonlinearities of their Large-Scale Macroeconomic Models?," Staff Working Papers 17-21, Bank of Canada.
    7. Gondo, Rocío & Pérez, Fernando, 2018. "The Transmission of Exogenous Commodity and Oil Prices shocks to Latin America - A Panel VAR approach," Working Papers 2018-012, Banco Central de Reserva del Perú.
    8. Sergio Urzua & Felipe Saffie & Felipe Benguria, 2017. "Demand Shocks and Labor Market Dynamics: Firm Level Responses to a Commodity Boom," 2017 Meeting Papers 1443, Society for Economic Dynamics.
    9. Alejandro Torres García & Laura Wberth Escobar, 2018. "Commodity Prices Shocks and the Balance Sheet Effect in Latin America," Documentos de Trabajo CIEF 016362, Universidad EAFIT.
    10. repec:eee:inecon:v:108:y:2017:i:c:p:368-376 is not listed on IDEAS
    11. Isha Agrawal & Rupa Duttagupta & Andrea F Presbitero, 2017. "International Commodity Prices and Domestic Bank Lending in Developing Countries," IMF Working Papers 17/279, International Monetary Fund.
    12. Jorda, Oscar & Nechio, Fernanda, 2018. "Inflation Globally," Working Paper Series 2018-15, Federal Reserve Bank of San Francisco.

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    JEL classification:

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

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