GDL

The combination of substantial terms of trade variability and unstable correlation patterns


of trade prices with output and trade volumes has led some to suggest a break in the link


between trade volumes and prices.We find that oil accounts for much of the variation in the


terms of trade over the last twenty five years and its quantitative role varies significantly


over time. And since our dynamic general equilibrium model predicts that the economy


responds differently to oil supply shocks than to other shocks, changes in their relative


importance helps to account for the unstable correlations in the data.

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