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How Important Are Terms of Trade Shocks

Author

Listed:
  • Stephanie Schmitt-Grohe

    (Columbia University)

  • Martin Uribe

    (Columbia University)

Abstract

According to conventional wisdom, terms of trade shocks represent a major source of business cycles in emerging and poor countries. This view is largely based on the analysis of calibrated business-cycle models. We argue that the view that emerges from empirical SVAR models is strikingly different. We estimate country-specific SVARs us- ing data from 38 poor and emerging countries and find that terms-of-trade shocks ex- plain only 10 percent of movements in aggregate activity. We then build a fully-fledged, open economy model with three sectors, importables, exportables, and nontradables, and use data from each of the 38 countries to obtain country-specific estimates of key structural parameters, including those defining the terms-of-trade process. In the es- timated theoretical business-cycle models terms-of-trade shocks explain on average 30 percent of the variance of key macroeconomic indicators, three times as much as in SVAR models.

Suggested Citation

  • Stephanie Schmitt-Grohe & Martin Uribe, 2016. "How Important Are Terms of Trade Shocks," 2016 Meeting Papers 1700, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1700
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    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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