Evolution of Canadian Business Cycle with Terms of Trade

The terms of trade of commodity exporting small open economies are subject to large variations, and can be an important source of macroeconomic fluctuations. This paper quantifies the relationship between the terms of trade and the business cycle using a small open economy real business cycle model. I then use this model to explore the implications of terms of trade shocks as a source of business cycle fluctuations in Canada. Results suggest that terms of trade shocks have been increasingly important in Canada since the commodity price boom in 2002.