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 economy. In our framework, 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. We also study the role of domestic factors in generating macroeconomic fluctuations as these factors are captured by the changes in sectoral productivity. Our results indicate that while trade shocks account for roughly 45% of economic fluctuations in aggregate output, financial shocks play only a minor role. Moreover, we find that adverse trade shocks induce prolonged recessions since they induce a significant decrease in aggregate investment. JEL Classification: F41, E31, E32, D58, F11.