Andrés Fernández, Inter-American Development Bank, and Stephanie Schmitt-Grohé and Martín Uribe, Columbia University and NBER

World Shocks, World Prices, And Business Cycles: An Empirical Investigation

There is no consensus on the importance of world prices in explaining aggregate fluctuations in individual countries. Existing studies, both theoretical and empirical, concentrate on single measures of the terms of trade constructed in different ways. This paper presents an empirical framework in which, for each country, agricultural, metal, and fuel commodity prices enter separately as mediators of world disturbances. Fernández, Schmitt-Grohé, and Uribe find that jointly, these three commodity prices explain on average 30 percent of aggregate fluctuations in a group of 138 countries. This contribution lies in between the range of values obtained by existing empirical and theoretical studies.