Assessing terms of trade volatility in Argentina, 1810-2010. A Fourier approach to decycling.

Amberes

Congreso; Arnoldshain Seminar XI. Migration, Development, and Demographic Change ? Problems, Consequences, Solutions.; 2013

The main thrust of the paper is to offer estimations of statistical volatility of the terms of trade (TOT) as a proxy for uncertainty. Volatility has been found costly for developing countries, but there is neither a unique measure, nor a canonical model to estimate a causal link between volatility and economic activity. There is also heterogeneity of findings in empirical research. We implement alternative definitions of volatility, going beyond frequently usedmethods based on the standard deviation (SD) of the TOT or of the detrended residual, by additionally modelling TOT cycles. Further, without agreed stylized facts regarded as conclusive of generalized behavior, country studies addressing the high volatility and heterogeneity of developing countries serve as a diagnostic device. We examine the case of Argentine, a prototype volatile land-abundant country, taking advantage of data availability for a fairly long span of two centuries between 1810 and 2010. To assess the volatility of TOT and GDP, the yearly series are first logged and subsequently detrended via two methods, cubic polynomial and Hodrick-Prescott; we then decompose the residuals in cyclesusing the Fourier technique. ?Volatility? is computed as a five year rolling sample standard deviation of these residuals. This modeling is based on the theoretical presumption that people are able to perceive not only trends, but also the presence of cycles in economic variables. To get indication of the possible influence of the choice of definition in the association between TOT volatility and GDP volatility for Argentina, a VAR exercise was performed: higher TOT volatility appears positively but weakly, associated with higher GDPvolatility in most of the alternative model specifications. We evaluate the empirical evidence and provide an economic interpretation in a historical perspective.