Working Paper: CEPR ID: DP10655
Authors: Stephanie Schmitt-Groh; MartÃn Uribe
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.
Keywords: business cycles; nontradable goods; real exchange rates; terms of trade
JEL Codes: E32; F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| theoretical model terms of trade shocks (F11) | variance of key macroeconomic indicators (E39) |
| theoretical model terms of trade shocks (F11) | variance of real exchange rate (F31) |
| terms of trade shocks (F14) | aggregate activity (E10) |
| terms of trade shocks (F14) | variance of real exchange rate (F31) |