Working Paper: NBER ID: w21253
Authors: Stephanie Schmitt-Grohe; 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 emerging and countries and find that terms-of-trade shocks explain less than 10 percent of movements in aggregate activity. We then build a three-sector open economy model and estimate key structural parameters country by country. We find that at the country level there is a disconnect between the empirical and theoretical models in the importance assigned to terms-of-trade shocks.
Keywords: terms of trade; business cycles; SVAR models; emerging economies
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 |
|---|---|
| Terms of trade shocks (F14) | Aggregate economic activity (E10) |
| Terms of trade shocks (F14) | GDP (E20) |
| Theoretical models (C59) | Variance of output (C29) |
| Terms of trade shocks (F14) | Business cycle fluctuations (E32) |