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How Important are Terms of Trade Shocks?
October 29, 2015Macro, Trade, and Finance Seminar Series

Speaker: Stephanie Schmitt-Grohe is a Professor of Economics at Columbia University. More »

Abstract: According to conventional wisdom, terms of trade shocks represent a major source of business cycles in emerging and poor countries. This view is largely based on the analysis of calibrated business-cycle models. We argue that the view that emerges from empirical SVAR models is strikingly different. We estimate country-specific SVARs using data from 38 poor and emerging countries and find that terms-of-trade shocks explain only 10 percent of movements in aggregate activity. We then build a fully-fledged, open economy model with three sectors, importables, exportables, and nontradables, and use data from each of the 38 countries to obtain country-specific estimates of key structural parameters, including those defining the terms-of-trade process. In the estimated theoretical business-cycle models terms-of-trade shocks explain on average 10 -15 percent of the variance of key macroeconomic indicators, which is consistent with the estimated SVAR models.

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Last Updated: Oct 29, 2015

The Macro, Trade, and Finance Seminar Series is a weekly series hosted by the World Bank's research department. The series invites leading researchers from the fields of macroeconomics, growth, trade, international integration, and finance to present the results of their most recent research in a seminar format. The full list of seminars can be viewed here.

Last Updated: Jul 27, 2015

Event Details
  • Date: October 29, 2015
  • Location: MC10-100
  • Time: 12:30 - 2:00 PM
  • CONTACT: Shweta Mesipam
  • smesipam@worldbank.org



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