Terms-of-Trade Effects of Productivity Shocks in Developing Economies

Özçelik, Emre and Tuğan, Mustafa (2019): Terms-of-Trade Effects of Productivity Shocks in Developing Economies.

Abstract

This paper studies the terms-of-trade effects from economy-specific shocks to productivity with a focus on developing economies using a panel vector autoregression model with interactive fixed effects and the “maxshare” approach. We find that the terms of trade in developing economies show insignificant dynamics after such shocks. The analysis of a more detailed classification of developing economies reveals a finding of critical importance: a positive economy-specific productivity shock results in a significant improvement in the terms of trade in the developing economies with a high degree of export diversification, indicating a clear violation of the small-country assumption for these economies.

• Item Type: MPRA Paper
• Language: English
• Keywords: Productivity shocks; The terms of trade; The small-country assumption.
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O57 - Comparative Studies of Countries

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