Unprecedented changes in the terms of trade

Abstract

The ongoing development of Asia has led to unprecedented changes in the terms of trade of commodity-exporting economies. Using a small open economy model we estimate changes in the long-run level and variance of Australia's terms of trade and study the quantitative implications of these changes. We find that the long-run prices of commodities that Australia exports started to increase significantly in mid 2003 and that the volatility of shocks to commodity prices doubled soon after. The persistent increase in the level of commodity prices is smaller than singleequation estimates suggest, but our inferences rely on many observables that in general equilibrium also respond to shifts in the long-run level of the terms of trade.

A Multi‐sector Model of the Australian Economy

“…Non‐tradeable prices are estimated to be the stickiest, followed by import prices, with the non‐resource tradeable sector exhibiting the most price flexibility. This ordering is consistent with Kulish and Rees ().…”

Critically Assessing Estimated DSGE Models: A Case Study of a Multi‐sector Model

“…Looking at the plot of the real exchange rate in Figure 2 (this is after meancorrecting the change in the nominal exchange rate and the domestic and foreign inflation rates), it is apparent that there is a deterministic trend in the data, that is, a shift in the mean of the growth rates after 2003, rather then a stochastic trend. Kulish and Rees (2017) noted this and proposed that one allow for such trend shifts in a model like the MSM. So the incorporation of white-noise measurement errors does not provide a satisfactory solution.…”

Reform of the International Monetary System. Why and How?, by John B.Taylor (MIT Press, Cambridge, MA, 2019), pp. 152.

“…One notable exception has been Australia, which, according to Taylor’s findings, has very much followed a rule‐based policy approach. For those of us who live in this part of the world, these findings are not surprising and they contribute to understanding why the Australian dollar exchange rate has risen since 2000 (in combination with changes in commodity prices; see Kulish & Rees, ). Since the GFC, central banks count with two disconnected instruments: interest rates and the supply of reserve balances.…”