IDEAS home Printed from
   My bibliography  Save this paper

Not all Terms of Trade Shocks are Alike


  • Juvenal, Luciana

    (International Monetary Fund)

  • Petrella, Ivan

    (University of Warwick)


Fluctuations in terms of trade are one of the major sources of concern for policy makers in developing countries. Theoretical models predict that terms of trade shocks account for a large share of business cycle fluctuations. However, recent empirical studies find a weak link between terms of trade and output fluctuations, uncovering the “terms of trade disconnect.” This disconnect happens because not all terms of trade shocks are alike. When analyzing terms of trade shocks, it is implicitly assumed that the economy responds symmetrically to changes in export and import prices. Our paper shows that this is not the case. To shed light on how terms of trade affect the economy, we estimate export price, import price and global demand shocks, which proxy for world disturbances, using a VAR model with sign-restrictions complemented with a narrative approach for a sample of 36 countries. We construct our own measure of export and import prices using commodity and manufacturing prices matched with trade shares. Our findings indicate that, taken together, export and import price shocks account for around 50 percent of output fluctuations. We also find that global demand shocks explain the high correlation between export and import prices since they generate a simultaneous increase in both, yielding a small effect on the terms of trade but large effects on the economy.

Suggested Citation

  • Juvenal, Luciana & Petrella, Ivan, 2019. "Not all Terms of Trade Shocks are Alike," EMF Research Papers 25, Economic Modelling and Forecasting Group.
  • Handle: RePEc:wrk:wrkemf:25

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    terms of trade ; commodity prices ; business cycles ; world shocks;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wrk:wrkemf:25. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ana Galvão (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.