Emerging Economies Business Cycles: The Role of Commodity Terms of Trade News

Posted: 22 Jun 2020

See all articles by Nadav Ben Zeev

Nadav Ben Zeev

Ben-Gurion University of the Negev - Department of Economics

Evi Pappa

Universidad Carlos III de Madrid

Alejandro Vicondoa

Pontificia Universidad Catolica de Chile

Date Written: July 17, 2017

Abstract

Recent empirical work has challenged the hypothesis that terms-of-trade shocks are an important source of cyclical fluctuations in emerging economies. We show that ignoring the news component in the terms-of-trade movements results in misleading conclusions about their importance as a source of cyclical fluctuations. Using a sample of Latin American countries, we identify news-augmented Commodity-terms-of-trade (CTOT) shocks by maximizing the forecast error variance share of the CTOT series at a finite future horizon. Our identification does not rely on zero impact restrictions typically used in the literature for recovering news shocks. Accounting for news almost doubles the contribution of CTOT to explain cyclical fluctuations: news-augmented CTOT shocks explain almost half of output variations in emerging economies.

Keywords: Commodity terms of trade, business cycles, news shocks, maximum forecast error variance, small open economy

JEL Classification: E32, F41

Suggested Citation

Ben Zeev, Nadav and Pappa, Evi and Vicondoa, Alejandro, Emerging Economies Business Cycles: The Role of Commodity Terms of Trade News (July 17, 2017). Journal of International Economics, Vol. 108, 2017, Available at SSRN: https://ssrn.com/abstract=3613414

Nadav Ben Zeev

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel

Evi Pappa

Universidad Carlos III de Madrid ( email )

CL. de Madrid 126
Madrid, Madrid 28903
Spain

Alejandro Vicondoa (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Avda. Vicuña Mackenna 4860
Macul, 780436
Chile

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