Are Terms of Trade Rises Inflationary?
This paper explores the relationship between the terms of trade and inflation. It shows, both analytically and empirically, that the exchange rate response to a change in the terms of trade is crucial to the inflation outcome. It suggests the existence of a ‘threshold’ exchange rate response. Our best estimate is that (other things being equal) a rise in the terms of trade is inflationary if the associated rise in the real exchange rate is less than about 1/3-1/2 of the rise in the terms of trade. However, if appreciation of the real exchange rate is larger than this, the consequent fall in the domestic price of importables is large enough that the terms of trade rise reduces inflation, at least in the short run.
|Date of creation:||Nov 1995|
|Contact details of provider:|| Postal: GPO Box 3947, Sydney NSW 2001|
Web page: http://www.rba.gov.au/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- L.P. O'Mara & N.A. Wallace & Helen Meshios, 1987. "The Current Account, Monetary Policy, Market Sentiment And The Real Exchange Rate: Some Implications For The Farm Sector," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 31(3), pages 219-241, December.
- Gruen, David W R & Wilkinson, Jenny, 1994.
"Australia's Real Exchange Rate--Is It Explained by the Terms of Trade or by Real Interest Differentials?,"
The Economic Record,
The Economic Society of Australia, vol. 70(209), pages 204-219, June.
- David W.R. Gruen & Jenny Wilkinson, 1991. "Australia’s Real Exchange Rate – Is it Explained by the Terms of Trade or by Real Interest Differentials?," RBA Research Discussion Papers rdp9108, Reserve Bank of Australia.
- Adrian Blundell-Wignall & Robert G. Gregory, 1990. "Exchange Rate Policy in Advanced Commodity-Exporting Countries: The Case of Australia and New Zealand," OECD Economics Department Working Papers 83, OECD Publishing.
- Dwyer, Jacqueline, 1992. "The Tradeable Non-tradeable Dichotomy: A Practical Approach," Australian Economic Papers, Wiley Blackwell, vol. 31(59), pages 443-459, December.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
- David Gruen & Geoffrey Shuetrim, 1994. "Internationalisation and the Macroeconomy," RBA Annual Conference Volume,in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia.
- Edwards, Sebastian & van Wijnbergen, Sweder, 1987. "Tariffs, The Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics," Oxford Economic Papers, Oxford University Press, vol. 39(3), pages 458-464, September.
- Sebastian Edwards & Sweder van Wijnbergen, 1987. "Tariffs, the Real Exchange Rate and the Terms of Trade: On Two Popular Propositions in International Economics," NBER Working Papers 2365, National Bureau of Economic Research, Inc.