World%20Shocks%2C%20World%20Prices%2C%20and%20Business%20Cycles%20%2D%20An%20Empirical%20Investigation

Working Papers

World Shocks, World Prices, and Business Cycles - An Empirical Investigation


CODE: IDB-WP-768
AUTHOR(s): Fernandez, Andres , Schmitt-Grohé, Stephanie , Uribe, Martín
PUBLISHED: June 2017
LANGUAGE: English
RELATED TOPICS: Macroeconomics
DOWNLOAD FILE IN: English

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 percent). 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 percent 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.

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