Ivan Petrella (Warwick Business School)
6 September 2023 @ 11:00 - 12:15
- Past event
Terms-of-Trade Shocks are Not all Alike
Abstract. Terms of trade are an inaccurate empirical proxy for how fluctuations in international prices affect the economy. To capture the relevance of terms of trade fluctuations for the domestic business cycle, the role of export and import prices needs to be analyzed sep-arately. Using a sample of developing economies, we find that the economy’s response to a positive export price shock does not mirror the response to a negative import price shock. 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 as drivers of output. Global demand and supply shocks, which simultaneously affect ex-port and import prices, are largely undetected in the terms-of-trade measure but signifi-cantly affect domestic business cycles. We link our results to existing small open economy models used to study the transmission of terms-of-trade shocks.
Joint with F. DiPace and L. Juvenal.