Discussion Paper Details

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Title: How Important Are Terms Of Trade Shocks?

Author(s): Stephanie Schmitt-Grohé and Martín Uribe

Publication Date: June 2015

Keyword(s): business cycles., nontradable goods, real exchange rates and Terms of trade

Programme Area(s): International Macroeconomics

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 SVAR models is strikingly different. We estimate country-specific SVARs using data from 38 poor and emerging countries and find that terms-of-trade shocks explain only 10 percent of movements in aggregate activity. We then build a fully-fledged, open economy model with three sectors, importables, exportables, and nontradables, and use data from each of the 38 countries to obtain country-specific estimates of key structural parameters, including those defining the terms-of-trade process. In the estimated theoretical business-cycle models terms-of-trade shocks explain on average 30 percent of the variance of key macroeconomic indicators, three times as much as in SVAR models.

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Bibliographic Reference

Schmitt-Grohé, S and Uribe, M. 2015. 'How Important Are Terms Of Trade Shocks?'. London, Centre for Economic Policy Research.