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 calibrate d to represent a "typical" African country. External shocks consist of trad e shocks, modeled as fluctuations in the prices of exported primary commodi ties, imported capital goods and intermediate inputs, and a financial shock , modeled as fluctuations in the world real interest rate. Trade shocks acc ount for roughly half of economic fluctuations in aggregate output. Moreove r, adverse trade shocks cause prolonged recessions since they induce a sign ificant decrease in aggregate investment. (C) 2001 Published by Elsevier Sc ience B.V.