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Do Terms of Trade Shocks Drive Business Cycles? Some Evidence from Structural Estimation

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  • Thomas Lubik
  • Wing Leong Teo

Abstract

Existing studies differ significantly on how much terms of trade shocks contribute to output fluctuations. Empirical studies based on VAR analysis find that terms of trade shocks explain less than 10% of output fluctuations while results from calibrated DSGE models suggest a figure of more than 50%. In this paper, we set out to bridge the gap between the two approaches by estimating a small scale DSGE model using a loss function based structural Bayesian inference approach. Our approach allows us to exploit cross-equation restrictions implied by the micro-founded structural model to estimate the contribution of terms of trade shocks to output fluctuations. We find that terms of trade shocks explain less than 5% of output fluctuations in our estimated model.

Suggested Citation

  • Thomas Lubik & Wing Leong Teo, 2005. "Do Terms of Trade Shocks Drive Business Cycles? Some Evidence from Structural Estimation," Computing in Economics and Finance 2005 377, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:377
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    More about this item

    Keywords

    Terms of Trade; Business Cycles; Small Open Economies; Structural Estimation; Bayesian Analysis;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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