At the New York Fed, our mission is to make the U.S. economy stronger and the financial system more stable for all segments of society. We do this by executing monetary policy, providing financial services, supervising banks and conducting research and providing expertise on issues that impact the nation and communities we serve.
Our economists engage in scholarly research and policy-oriented analysis on a wide range of important issues.
The mission of the Applied Macroeconomics and Econometrics Center (AMEC) is to provide intellectual leadership in the central banking community in the fields of macro and applied econometrics.
The Center for Microeconomic Data offers wide-ranging data and analysis on the finances and economic expectations of U.S. households.
The monthly Empire State Manufacturing Survey tracks the sentiment of New York State manufacturing executives regarding business conditions.
This ongoing Liberty Street Economics series analyzes disparities in economic and policy outcomes by race, gender, age, region, income, and other factors.
As part of our core mission, we supervise and regulate financial institutions in the Second District. Our primary objective is to maintain a safe and competitive U.S. and global banking system.
The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
Need to file a report with the New York Fed? Here are all of the forms, instructions and other information related to regulatory and statistical reporting in one spot.
The New York Fed works to protect consumers as well as provides information and resources on how to avoid and report specific scams.
The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The New York Fed provides a wide range of payment services for financial institutions and the U.S. government.
The New York Fed offers the Central Banking Seminar and several specialized courses for central bankers and financial supervisors.
The New York Fed has been working with tri-party repo market participants to make changes to improve the resiliency of the market to financial stress.
We are connecting emerging solutions with funding in three areas—health, household financial stability, and climate—to improve life for underserved communities. Learn more by reading our strategy.
The Economic Inequality & Equitable Growth hub is a collection of research, analysis and convenings to help better understand economic inequality.
The Governance & Culture Reform hub is designed to foster discussion about corporate governance and the reform of culture and behavior in the financial services industry.
Press Release
|
Coping with Terms-of-Trade Shocks in Developing Countries |
November 21, 2003 | |||
Note To Editors |
|
||
“Coping with Terms-of-Trade Shocks in Developing Countries,” the latest edition of the New York Fed’s Current Issues in Economics and Finance, is enclosed for your review. This study shows that the exchange rate regime adopted by developing countries plays a key role in their adjustment to fluctuations in export and import prices. Analyzing the effects of a sharp drop in export prices in seventy-five developing countries over a twenty-five year period, authors Christian Broda and Cédric Tille find that countries with a flexible exchange rate experience a much milder decline in GDP growth than those with fixed exchange rate regimes. The authors note that developing countries rely heavily on the export of commodities and tend to be very open to foreign trade. Thus, these countries are particularly vulnerable to terms-of-trade shocks—marked changes in the price of exports relative to the price of imports. Such broad exposure to terms-of-trade fluctuations is a source of concern, the authors explain, because it can lead to increased volatility in GDP. The authors observe that flexible exchange rates are traditionally effective in absorbing terms-of-trade shocks. If export prices decline in a country with a flexible exchange rate, for example, its currency is likely to depreciate, stimulating activity in the export sector and significantly offsetting the negative effects of the price decline on output. In countries with a fixed exchange rate, by contrast, this buffer is absent, and the adjustment to the decline in export prices must occur largely through a contraction in output. To test this thesis, Broda and Tille assessed the effects of a 10 percent decline in the terms of trade on seventy-five developing countries in Africa, Latin America, Asia, and Eastern Europe over the 1973-98 period. They found that in countries with a fixed exchange rate, the shock led to a decline in GDP of nearly 2 percent after two years. In countries with a flexible exchange rate, however, the shock produced only a very modest contraction in GDP—about 0.2 percent. “These results,” the authors conclude, “provide strong support for the theory that a flexible exchange rate can help to insulate an economy against fluctuations in export and import prices.” To show how forcefully fluctuations in the terms of trade will drive economic activity when the buffer provided by a flexible exchange rate is removed, Broda and Tille examine the experience of two countries with fixed exchange rate regimes, Ecuador and Argentina. Ecuador enjoyed a surge in its export prices after 2000, while Argentina faced large declines in export prices in 1998 and 1999. After controlling for other influences on the two countries’ economies, the authors find that these sharply contrasting terms-of-trade movements contributed heavily to widely divergent output performances in Ecuador and Argentina in recent years. Christian Broda is an economist and Cédric Tille is a senior economist in the Bank’s Research and Market Analysis Group. Contact: |