Identifying terms of trade shocks in a developing country using a sign restrictions approach

Kagiso Mangadi*, Jeffrey Sheen

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

Using annual data for Botswana from 1960 to 2012, we examine the responses of macroeconomic variables to four generalized positive terms of trade shocks–global demand, globalizing, sector-specific and global supply. A sign-restricted structural vector autoregression model with a penalty function is estimated to identify the four possible shocks. While positive global demand and globalization shocks are both expansionary, they have opposite effects on inflation. A positive commodity market specific shock dampens real GDP growth and is inflationary, suggesting a possible Dutch disease response. A negative global supply shock suppresses both output growth and inflation. All but the last shock leads to a significant declining interest rate. Monetary policy contraction is recommended for the first shock and expansion for the others.

Original languageEnglish
Pages (from-to)2298-2315
Number of pages18
JournalApplied Economics
Volume49
Issue number24
DOIs
Publication statusPublished - 21 May 2017

Keywords

  • developing country
  • penalty function
  • sign restrictions
  • SVAR models
  • Terms of trade shocks

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