Working Paper: NBER ID: w9867
Authors: Sebastian Edwards; Eduardo Levy Yeyati
Abstract: In this paper we analyze empirically the effect of terms of trade shocks on economic performance under alternative exchange rate regimes. We are particularly interested in investigating whether terms of trade disturbances have a smaller effect on growth in countries with a flexible exchange rate regime, than in countries with a more rigid exchange rate arrangement. We also analyze whether negative and positive terms of trade shocks have asymmetric effects on growth, and whether the magnitude of these asymmetries depends on the exchange rate regime. We find evidence suggesting that terms of trade shocks get amplified in countries that have more rigid exchange rate regimes. We also find evidence of an asymmetric response to terms of trade shocks: the output response is larger for negative than for positive shocks. Finally, we find evidence supporting the view that, after controlling for other factors, countries with more flexible exchange rate regimes grow faster than countries with fixed exchange rates.
Keywords: No keywords provided
JEL Codes: F30; F32
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) | Economic performance (countries with rigid exchange rate regimes) (F31) |
| Terms of trade shocks (F14) | Economic performance (countries with flexible exchange rate regimes) (F31) |
| Economic performance (rigid exchange rate regimes) (F31) | Economic performance (flexible exchange rate regimes) (F31) |
| Negative terms of trade shocks (F14) | Output response (Y60) |
| Positive terms of trade shocks (F14) | Output response (Y60) |
| Output response (negative shocks) (E39) | Output response (positive shocks) (E39) |
| Flexible exchange rate regimes (F33) | Economic growth (O00) |
| Fixed exchange rate regimes (F33) | Economic growth (O49) |