Commodity Terms of Trade Level, Volatility, and Business Cycles

Abstract

Based on a panel of 53 advanced and emerging countries, we evaluate the contributions of both commodity terms of trade level and volatility shocks in explaining business cycle fluctuations. By estimating with an SVAR-SV model with the stochastic volatility built in the mean equation, we find that the level shocks and volatility shocks together explain over 14\% of long run output fluctuations. Our results indicate that the commodity terms of trade volatility shocks generally lead to recessionary economic consequences, while the level shocks yield output responses that can be both positive or negative for an individual country. Furthermore, we identify a global factor with time-varying volatility that explains 74.3\% of terms of trade movements in the median country, showing the existence of the global commodity terms of trade cycle. As a part of the cycle, the common volatility positively co-moves with major economic uncertainty measures and negatively co-moves with global demand.

Keywords: Terms of trade, Commodity prices, Business cycles, Uncertainty

JEL Classification: E32; F41