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Oil Prices and the Terms of Trade

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  • David K. Backus
  • Mario J. Crucini

Abstract

The combination of substantial terms of trade variability and unstable correlation patterns of trade prices with output and trade volumes has led some to suggest a break in the link between trade volumes and prices. We find that oil accounts for much of the variation in the terms of trade over the last twenty five years and its quantitative role varies significantly over time. And since our dynamic general equilibrium model predicts that the economy responds differently to oil supply shocks than to other shocks, changes in their relative importance help to account for the unstable correlations in the data.

Suggested Citation

  • David K. Backus & Mario J. Crucini, 1998. "Oil Prices and the Terms of Trade," NBER Working Papers 6697, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6697
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    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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