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.
