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Abstract
Recent studies have recommended the use of more disaggregated world price measures when formulating empirical and theoretical models on business cycles, challenging thus the hypothesis that shocks to the terms of trade (TOT) are an essential source of cyclical fluctuations in emerging economies. This paper aims to analyze the impact of shocks to raw materials prices on business cycles, and to assess the capacity of TOT as a proxy in theoretical models. Using annual data for Ecuador, a SVAR was estimated in which multiple prices transmit global shocks, as well as an MX model with exogenous shocks to TOT. The results show that shocks explain between 23 % and 37 % of the fluctuations in domestic macroeconomic variables and that commodity terms of trade (CTOT) have the best performance in the MX model in relation to an empirical benchmark specification. These results corroborate the importance of shocks to commodity prices while revitalizing the role of TOT.
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