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Terms of Trade and Small Open Economies Business Cycles: The role of Global Shocks

Author

Listed:
  • Christian Velasquez

    (Banco Central de Reserva del Perú)

Abstract

This paper proposes a new identification strategy to disentangle terms of trade movements due to global factors (global shocks) from country-specific fluctuations. This method is then applied to data on ten small open economies (SOEs) to show that global shocks contribute 33 percent of SOE business cycle. In contrast, idiosyncratic innovations account for around 80 percent of terms-of-trade volatility but are responsible for less than 10 percent of business cycle variability. The estimates suggest that developed economies are less sensitive to global shocks compared to emerging markets. The results help to reconcile current estimates on the importance of terms of trade for SOEs.

Suggested Citation

  • Christian Velasquez, 2024. "Terms of Trade and Small Open Economies Business Cycles: The role of Global Shocks," Working Papers 2024-024, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2024-024
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    File URL: https://www.bcrp.gob.pe/docs/Publicaciones/Documentos-de-Trabajo/2024/documento-de-trabajo-024-2024.pdf
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    More about this item

    Keywords

    Small open economies; global shocks; international business fluctuations;
    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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