World Shocks, World Prices, and Business Cycles: An Empirical Investigation

28 Pages Posted: 14 Nov 2016

See all articles by Andrés Fernàndez

Andrés Fernàndez

Inter-American Development Bank (IDB) - Research Department

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2016

Abstract

Most existing studies of the macroeconomic effects of global shocks assume that they are mediated by a single intratemporal relative price such as the terms of trade and possibly an intertemporal price such as the world interest rate. This paper presents an empirical framework in which multiple commodity prices and the world interest rate transmit world disturbances. Estimates on a panel of 138 countries over the period 1960-2015 indicate that world shocks explain on average 33 percent of aggregate fluctuations in individual economies. This figure doubles when the model is estimated on post 2000 data. The increase is attributable mainly to a change in the domestic transmission mechanism as opposed to changes in the world commodity price process as argued in the literature on the financialization of world commodity markets.

Suggested Citation

Fernandez, Andres and Schmitt-Grohe, Stephanie and Uribe, Martin, World Shocks, World Prices, and Business Cycles: An Empirical Investigation (November 2016). NBER Working Paper No. w22833, Available at SSRN: https://ssrn.com/abstract=2868932

Andres Fernandez (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

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Stephanie Schmitt-Grohe

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER)

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Martin Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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