The Terms of Trade and Economic Fluctuations
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.
Series:
Working Paper No. 1992/098
Subject:
Business cycles Consumption Economic growth Import prices International trade National accounts Prices Terms of trade Trade balance
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.
English
Publication Date:
November 1, 1992
ISBN/ISSN:
9781451852066/1018-5941
Stock No:
WPIEA0981992
Pages:
72
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