Trade shocks and macroeconomic fluctuations in Africa

This paper examines the role of external shocks in explaining macroeconomic fluctuations in African countries. We construct a quantitative, stochastic, dynamic, multi-sector equilibrium model of a small open economy calibrated to represent a “typical” African country. External shocks consist of trade shocks, modeled as fluctuations in the prices of exported primary commodities, imported capital goods and intermediate inputs, and a financial shock, modeled as fluctuations in the world real interest rate. Trade shocks account for roughly half of economic fluctuations in aggregate output. Moreover, adverse trade shocks cause prolonged recessions since they induce a significant decrease in aggregate investment.