How Important are Terms‐Of‐Trade Shocks?

27 Pages Posted: 20 Feb 2018

See all articles by Stephanie Schmitt-Grohé

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)

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Date Written: February 2018

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 structural vector autoregression (SVAR) models is strikingly different. We estimate country‐specific SVARs using data from 38 countries and find that terms‐of‐trade shocks explain less than 10% of movements in aggregate activity. We then estimate key structural parameters of a three‐sector business‐cycle model country by country and find a disconnect between the importance assigned to terms‐of‐trade shocks by theoretical and SVAR models.

Suggested Citation

Schmitt-Grohe, Stephanie and Uribe, Martin, How Important are Terms‐Of‐Trade Shocks? (February 2018). International Economic Review, Vol. 59, Issue 1, pp. 85-111, 2018, Available at SSRN: https://ssrn.com/abstract=3125185 or http://dx.doi.org/10.1111/iere.12263

Stephanie Schmitt-Grohe (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

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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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