Oil prices and the terms of trade

The combination of substantial terms of trade variability and unstable corr elation 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 t hat oil accounts for much of the variation in the terms of trade over the l ast twenty five years and its quantitative role varies significantly over t ime. And since our dynamic general equilibrium model predicts that the econ omy responds differently to oil supply shocks than to other shocks, changes in their relative importance helps to account for the unstable correlation s in the data. (C) 2000 Elsevier Science B.V. All rights reserved.