How Important Are Terms Of Trade Shocks?
NBER Working Paper No. 21253
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 using data from 38 emerging and countries and find that terms-of-trade shocks explain less than 10 percent of movements in aggregate activity. We then build a three-sector open economy model and estimate key structural parameters country by country. We find that at the country level there is a disconnect between the empirical and theoretical models in the importance assigned to terms-of-trade shocks.
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Document Object Identifier (DOI): 10.3386/w21253
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