Terms of trade volatility and macroeconomic adjustment in a resource exporting economy: the case of Australia

This paper is concerned with analysing, both empirically and theoretically, the macroeconomic consequences arising from terms-of-trade volatility for a resource producing and exporting economy, with emphasis placed upon the Australian experience. Using Australian quarterly data for the period 1975 to 1991, the existence of a long-term relationship between the terms of trade and nine key macroeconomic variables is empirically verified. These findings form the basis of the theoretical framework, which is simulated, using plausible parameter values, for terms-of-trade disturbances similar to that experienced by Australia during the 1980s. Comparisons with actual developments are then conducted.