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Evi Pappa (European University Institute, Firenze)

23 settembre 2015 ore 14:30 - 15:45

Aula Sala riunioni (livello docenti)


 Emerging economies business
cycles: The role of the terms of trade revisited


and Uribe (2015) estimate annual country-specific SVARs for 38 poor and
emerging countries and find that the terms-of-trade shocks explain only 10 % of
movements in aggregate activity. On the other hand they show that in standard
estimated small open economy models terms-of-trade (TOT) shocks explain on
average 30 % of the variance of key macroeconomic indicators, three times as
much as in SVAR models. This disconnect between the empirical and theoretical
models raises doubts about the validity of the existing models for explaining
business cycle dynamics in emerging countries. Our research is motivated by the
observation that many movements in the terms of trade are anticipated. It is
important to examine whether anticipated movements in the terms of trade matter
for business cycle dynamics of small emerging countries. Using quarterly data
for Latin American countries we revisit the role of expected and unexpected
changes in the terms of trade in propagating business cycle fluctuations. Our identification
strategy relies on “medium-run” constraints and builds on Uhlig (2003) 
and Barsky and Sims (2011).  News shocks to the terms of trade is
identified as the shock that best explains future movements in TOT over a
horizon of 5 years and is orthogonal to current value of TOT. We show that TOT
news matter more than unexpected TOT shocks for business cycle fluctuations in
emerging countries and that  TOT hypothesis as a source of business cycle
fluctuations in emerging markets is not dead. A standard small open economy
model can replicate our empirical findings.