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World Prices and Business Cycles of a Small Open Input-Output Economy

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  • Khelifi, Atef

Abstract

The role of terms-of-trade shocks in driving economic fluctuations is revisited through a multisector small open economy (SOE) model, where the various types of goods can all be consumed and employed as inputs. Under this assumption, we show that contrary to conventional wisdom, terms-oftrade shocks may not necessarily trigger an economic boom for the exporting country, if its export goods are intensively employed or consumed domestically. We calibrate and estimate the proposed model using data from 15 emerging countries and find that it performs better than the standard model to explain the different impacts of terms-of-trade shocks across countries documented by Schmitt-Grohe and Uribe (2018).

Suggested Citation

  • Khelifi, Atef, 2023. "World Prices and Business Cycles of a Small Open Input-Output Economy," MPRA Paper 116519, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:116519
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    File URL: https://mpra.ub.uni-muenchen.de/116519/1/MPRA_paper_116519.pdf
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    References listed on IDEAS

    as
    1. Fernández, Andrés & Schmitt-Grohé, Stephanie & Uribe, Martín, 2017. "World shocks, world prices, and business cycles: An empirical investigation," Journal of International Economics, Elsevier, vol. 108(S1), pages 2-14.
    2. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
    3. Robert C. Johnson, 2014. "Trade in Intermediate Inputs and Business Cycle Comovement," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 39-83, October.
    4. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    5. Otto, G., 2003. "Terms of trade shocks and the balance of trade: there is a Harberger-Laursen-Metzler effect," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 155-184, April.
    6. 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.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Terms of trade; business cycles; microfounded dynamic Leontief input-output model; DSGE model;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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