When analyzing terms-of-trade shocks, it is implicitly assumed that the economy responds symmetrically to changes in export and import prices. Using a sample of developing countries our paper shows that this is not the case. We construct export and import price indices using commodity and manufacturing price data matched with trade shares and separately identify export price, import price, and global economic activity shocks using sign and narrative restrictions. Taken together, export and import price shocks account for around 40 percent of output fluctuations but export price shocks are, on average, twice as important as import price shocks for domestic business cycles.
import prices. We show that this is not the case and document that the effects of a positive exportpriceshock do not mirror the effects of a negative import price shock. This could happen for a number of reasons. For example, if the exportable and importable sectors have different weights in the economy, or due to the shocks having different channels of transmissions. Drechsel and Tenreyro (2018) , for instance, highlight the presence of a “borrowing cost channel” associated to shifts in the price of exports. Overall, this implies that the terms-of-trade shocks
GDP growth varied from a 9 percent contraction in GDP after a major drought in Zimbabwe to a less than 1 percent dip in the growth rate in Cambodia following a combination of a drought and flood ( Box 1 and Annex I ).
Box 1. Impacts of Exogenous Shocks: Evidence from Five Case Studies
Five case studies were prepared as background for this paper: Cambodia (drought/flood, 1994), Honduras (hurricane, 1998), Zimbabwe (drought, 1992), Mali (exportpriceshock, 1992–93), and Uganda (exportpriceshock, 1987–92). These were chosen to illustrate variation in type
We examine the effect that revenue windfalls from international commodity price shocks have on sovereign bond spreads using panel data for 30 emerging market economies during the period 1997-2007. Our main finding is that positive commodity price shocks lead to a significant reduction in the sovereign bond spread in democracies, but to a significant increase in the spread in autocracies. To explain our finding we show that, consistent with the political economy literature on the resource curse, revenue windfalls from international commodity price shocks significantly increased real per capita GDP growth in democracies, while in autocracies GDP per capita growth decreased.