Commodity Exporters, Heterogeneous Importers, and the Terms of Trade
Published:
How important are shocks to the terms of trade relative to TFP shocks as a source of consumption volatility in commodity-exporting economies when firms are heterogeneous? In light of mounting evidence of heterogeneity in firm-level trade adjustment, we develop an analytical framework that nests a benchmark Small-Open Economy International Real Business Cycle (SOE-IRBC) model, a tractable general equilibrium version of Gopinath & Neiman (2014), and several frameworks in between. The analysis yields three key theoretical results. First, the equilibria of the models are the fixed point of a single equation in the economy’s trade openness, which coincides with the imports-to-consumption ratio. Second, the differences between the models are captured by two elasticities that relate changes in key aggregate variables to changes in trade openness. Finally, the relative importance of terms of trade shocks depends on one general equilibrium elasticity, which we call the terms-of-trade elasticity, independent of assumptions on market structure, returns to scale, and selection into importing. As the terms-of-trade elasticity depends on equilibrium trade openness, we find that the different models predict virtually the same relative importance of shocks to the terms of trade shocks when calibrated to match the same level of trade openness. Our results suggest that matching key micro-moment of heterogeneous trade adjustment across firms does not change the relative importance of terms-of-trade shocks in generating aggregate fluctuations once trade openness is accounted for.