The Terms of Trade and Economic Fluctuations
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.
Year of publication: |
1992-11-01
|
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Authors: | Mendoza, Enrique G. |
Institutions: | International Monetary Fund (IMF) |
Saved in:
freely available
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