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World prices and business cycles in a small open input–output economy

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  • Khelifi, Atef

Abstract

The role of terms-of-trade shocks in driving economic fluctuations is revisited through a multisector small open economy model, where the various types of goods can all be consumed and employed as inputs. Under this assumption, we show that, unlike conventional wisdom, terms-of-trade shocks may not necessarily trigger an economic boom for the exporting country if its export goods are intensively employed or consumed domestically, with limited scope for substitution. We calibrate and estimate the proposed model using data from 15 emerging countries and find that it performs better than the standard model to explain the different impacts of terms-of-trade shocks across countries documented by Schmitt-Groh and Uribe (2018). Such results make the model an excellent new framework to extend the analysis of monetary policies and the effects of price changes.

Suggested Citation

  • Khelifi, Atef, 2023. "World prices and business cycles in a small open input–output economy," Economic Modelling, Elsevier, vol. 118(C).
    • Handle: RePEc:eee:ecmode:v:118:y:2023:i:c:s0264999322003376
    DOI: 10.1016/j.econmod.2022.106100
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    References listed on IDEAS

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    1. Fernández, Andrés & González, Andrés & Rodríguez, Diego, 2018. "Sharing a ride on the commodities roller coaster: Common factors in business cycles of emerging economies," Journal of International Economics, Elsevier, vol. 111(C), pages 99-121.
    2. Otto, G., 2003. "Terms of trade shocks and the balance of trade: there is a Harberger-Laursen-Metzler effect," Journal of International Money and Finance, Elsevier, vol. 22(2), pages 155-184, April.
    3. Fernández, Andrés & Schmitt-Grohé, Stephanie & Uribe, Martín, 2017. "World shocks, world prices, and business cycles: An empirical investigation," Journal of International Economics, Elsevier, vol. 108(S1), pages 2-14.
    4. Kose, M. Ayhan, 2002. "Explaining business cycles in small open economies: 'How much do world prices matter?'," Journal of International Economics, Elsevier, vol. 56(2), pages 299-327, March.
    5. Robert C. Johnson, 2014. "Trade in Intermediate Inputs and Business Cycle Comovement," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 39-83, October.
    6. Stephanie Schmitt†Grohé & Martín Uribe, 2018. "How Important Are Terms†Of†Trade Shocks?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(1), pages 85-111, February.
    7. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    8. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
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    More about this item

    Keywords

    Terms of trade; Business cycles; Microfounded dynamic input–output model; DSGE model;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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