The Terms of Trade and Economic Fluctuations
November 1, 1992
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Summary
A three-good, stochastic intertemporal equilibrium model of a small open economy is used to examine the link between terms of trade and business cycles. Equilibrium co-movements of model economies representing industrial and developing countries are computed and compared with the stylized facts of 30 countries. The results show that terms-of-trade shocks account for half of observed output variability and that the model mimics the Harberger-Laursen-Metzler effect and produces large deviations from purchasing power parity. The elasticity of substitution between tradable and nontradable goods and the persistence of the shocks play a key role in producing these results.
Subject: Business cycles, Consumption, Economic growth, Import prices, International trade, National accounts, Prices, Terms of trade, Trade balance
Keywords: Africa, Asia and Pacific, Business cycles, Consumption, form terms of trade, Import prices, Middle East, open economy, real GDP, standard deviation, Terms of trade, terms-of-trade disturbance, terms-of-trade effect, terms-of-trade shock, Trade balance, U.S. dollar, Western Hemisphere, WP
Pages:
72
Volume:
1992
DOI:
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Issue:
098
Series:
Working Paper No. 1992/098
Stock No:
WPIEA0981992
ISBN:
9781451852066
ISSN:
1018-5941
Notes
A three-good, stochastic intertemporal equilibrium model of a small open economy is used to examine the link between terms of trade and business cycles.
