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Driving Economic Fluctuations in Peru: The Role of the Terms of Trade

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This paper has four objectives. Firstly, to verify the existence of long-term relationships between the groups of variables analyzed (product, consumption, private investment, public investment, and terms of trade). Secondly, to analyze the role of public and private investment, as well as the role of the terms of trade in the Peruvian economy’s economic ‡uctuations. Thirdly, to identify domestic and foreign shocks, as well as the degree of importance of both in the economy’s ‡uctuations. Finally, to identify the role and the impact of permanent and transitory shocks in the economic p‡uctuations of an emerging economy such as Peru. To achieve these objectives, we follow the focuses of King et al. (1991), Mellander et al. (1992), and Warne (1993); additionally, the analysis disaggregates the total public and private investment. The primary result is that the permanent shocks of the terms of trade (foreign shocks) account for most of the ‡uctuations in product, consumption, private investment, and public investment. This result appears more pronounced as the time horizon approaches the long-term. The transitory shocks, for their part, explain the fluctuations of some variables only in the short term.


Fluctuations, Output, Consumption, Private Investment, Public Investment, Terms of Trade, Permanent and Transitory Shocks, Domestic and Foreign Shocks, Developing Small Open Economy, Common Trends, Cointegration

JEL Classification

32, F41, F43, C32