Global shocks, terms of trade and Small Open Economies business cycles


Terms of trade have been largely considered an important determinant of business cycles in Small Open Economies (SOEs). Current estimates of their contribution to fluctuations in real variables show a large variability and do not exploit the full information from global indicators to improve their reliability. In this paper, I propose a novel strategy that allows me to separately identify innovations in terms of trade and global variables by extending the news identification approach. Results show that the proposed method successfully identifies a global component and suggests that it explains about a half of output volatility in emerging countries and around one-third for developed commodity exporters, while terms of trade idiosyncratic movements are responsible only for 10 percent.

Christian Velasquez
Christian Velasquez
Ph.D. Candidate

My research interests include Macroeconomics of Climate Change, International finance, and Small Open Economies.