Research Discussion Paper – RDP 2013-10 Stochastic Terms of Trade Volatility in Small Open Economies

Contents

• Introduction
• Literature Review
• Estimating the Law of Motion for the Terms of Trade
• The Impact of Volatility Shocks: Empirics
• The Impact of Volatility Shocks: Theory
• Results
• Robustness Checks
• Conclusion
• Appendix A: Data Sources, Definitions and Transformations
• Appendix B: Terms of Trade Processes – HP-filtered Data
• Appendix C: Estimating Stochastic Volatility
• Appendix D: Terms of Trade Processes – GARCH Estimation
• Appendix E: What Does the Empirical VAR Capture?
• References

The Discussion Paper series is intended to make the results of the current economic research within the Reserve Bank available to other economists. Its aim is to present preliminary results of research so as to encourage discussion and comment. Views expressed in this paper are those of the authors and not necessarily those of the Reserve Bank. Use of any results from this paper should clearly attribute the work to the authors and not to the Reserve Bank of Australia.

The contents of this publication shall not be reproduced, sold or distributed without the prior consent of the Reserve Bank of Australia.

We would like to thank Guido Lorenzoni, Ivan Wérning, George-Marios Angeletos, Arnaud Costinot, Anna Mikusheva, Leon Berkelmans, Alexandra Heath and Christopher Kent for comments and helpful suggestions.