World Shocks, World Prices, and Business Cycles: An Empirical Investigation

SVAR models that include a single world price (such as the terms-of-trade) predict that world shocks explain a small fraction of movements in domestic output (typically less than 10%). This paper presents an empirical framework in which multiple commodity prices transmit world disturbances. Estimates on a panel of 138 countries over the period 1960–2015 indicate that world shocks explain on average 33% of output fluctuations in individual economies. This figure doubles when the model is estimated on post 2000 data. The findings reported here suggest that one-world-price specifications significantly underestimate the importance of world shocks for domestic business cycles.