Prepared by Rita Babihuga.
Based on data from WITS (World Integrated Trading System).
Generalized commodity price indices e.g.,. the IMF commodity price index is weighted in favor of advanced economies’ trade, while the World Bank index is weighted toward developing economies’ trade—and hence may not provide the most accurate representation of trade weights for Uruguay. Uruguay specific terms of trade indices are not available for a sufficiently long period of time—the central bank’s index has been discontinued.
This methodology allows for the specification of informative steady-state priors for the variables used in the model, which reduces the problem of degrees of freedom arising from the generous parameterization associated with conventional VAR models, and improves forecasting performance. Interpreting the impulse response functions (which allow for imposing block exogeneity) is sufficient for the narrow purposes of this paper and we leave the discussion of the forecasts for a forthcoming working paper.
We estimate an alternative specification of the model using URY specific commodity price index.
We estimate several alternative specifications and report the results based on the general commodity price index (as opposed to the Uruguay specific index), as well as the separate impact of non oil commodity price shocks, and the impact on revenues and expenditures.
One standard deviation shock is roughly equivalent to a 17 percentage point increase in commodity prices.
This result is corroborated in the companion selected issues paper “The Influence of “Big Brother:” Does Uruguay Face Two Rests of the World?