engleski

Testing Nonlinear Dynamics in Terms of Trade with Aggregated Data: Implications for Economic Growth Models

For many decades, world trade has grown on average nearly twice as fast as total world output. International trade flows have exploded since the 1980s, however high and middle-income countries continue to make up the main players in international trade. Favourable movements in global export prices lead to similar movements in terms of trade in developed and developing countries, but it still has not stopped the latent deterioration of the terms of trade of undeveloped countries. Though we can detect general convergence in the dynamics and lower volatility of the terms of trade, this still does not explain the evolution of the terms of trade. We still have to asses if the movements in this variable are random. This paper examines long time aggregated series data (1960–2015) of the terms of trade for the variety of (grouped) countries to find out if there are any signs of nonlinearity in these series. Finding evidence of nonlinearity suggests that economic models that include terms of trade can improve by switching from linear to nonlinear modelling strategy. For this purpose, we use BDS nonparametric test as it is one of the most popular tests for nonlinearity. We can use it as a portmanteau test or miss-specification test when applied to the residuals from a fitting model. The results reject the nonlinearity presumption going in favour of linear behaviour of the terms of trade.

International Trade Dynamics ; Terms of Trade ; Nonlinearity ; BDS Test ; Univariate Analysis ; Country Groups

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