World shocks, world prices, and business cycles: An empirical investigation*

https://doi.org/10.1016/j.jinteco.2017.01.001Get rights and content
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Abstract

SVAR models that include a single world price (such as the terms-of-trade) predict that world shocks explain a small fraction of movements in domestic output (typically less than 10%). This paper presents an empirical framework in which multiple commodity prices transmit world disturbances. Estimates on a panel of 138 countries over the period 1960–2015 indicate that world shocks explain on average 33% of output fluctuations in individual economies. This figure doubles when the model is estimated on post 2000 data. The findings reported here suggest that one-world-price specifications significantly underestimate the importance of world shocks for domestic business cycles.

JEL classification

F41

Keywords

World shocks
Commodity prices
Business cycles

Cited by (0)

*

We would like to thank Laura Alfaro, Ivan Petrella, and seminar participants at Banco de la República and the International Seminar on Macroeconomics held in Sofia, Bulgaria, June 24–25, 2016 for comments. Santiago Tellez-Alzate and Javier Caicedo provided excellent research assistance. The views expressed in this paper are those of the authors and not necessarily those of the Inter-American Development Bank, its Board of Directors, or the countries it represents.