Working Paper: CEPR ID: DP14594
Authors: Federico Di Pace; Luciana Juvenal; Ivan Petrella
Abstract: When analyzing terms-of-trade shocks, it is implicitly assumed that the economy responds symmetrically to changes in export and import prices. We show that this is not the case: the effects of a positive export price shock do not mirror the effects of a negative import price shock. For our analysis, we construct a dataset of export and import price indices by matching commodity and manufacturing price data with trade shares for a sample of developing countries. We identify export price, import price, and global economic activity shocks using sign and narrative restrictions. Taken together, export and import price shocks account for around 30 percent of output fluctuations but export price shocks are more important than import price shocks for domestic business cycles. Global economic activity shocks, which simultaneously affect export and import prices, are largely undetected in the terms-of-trade measure but have large effects on domestic business cycles. We link our results to existing small open economy models used to study the transmission of terms-of-trade shocks.
Keywords: terms of trade; commodity prices; business cycles; world shocks
JEL Codes: F41; F44; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive export price shock (F14) | Increase in domestic GDP (E20) |
| Positive export price shock (F14) | Increase in private consumption (E20) |
| Positive export price shock (F14) | Increase in investment (E22) |
| Positive export price shock (F14) | Appreciation of the real exchange rate (F31) |
| Negative import price shock (E31) | Decline in domestic GDP (E20) |
| Negative import price shock (E31) | Insignificant effects on private consumption (D19) |
| Negative import price shock (E31) | Minimal impact on investment (G11) |
| Negative import price shock (E31) | Positive comovement between terms of trade and real exchange rate (F14) |
| Positive export price shock (F14) | Positive comovement between terms of trade and output (F14) |