The Nexus between Terms of Trade Volatility and Output Growth Volatility: Evidence from Lower-Middle-Income Economies

Abstract

Global economies are increasingly integrated through international trade, where favorable terms of trade determine the direction of nations towards sustainable economic growth. This study examines the nexus between volatilities in terms of trade and output growth for lower-middle-income countries. Using data for 12 low-middle-income nations, this study employs the Generalized Method of Moments (GMM) estimation technique. The empirical results of this study suggest positive association between terms of trade volatility and output volatility. To put it differently, terms of trade volatility lead to macroeconomic instability. Additionally, the introduction of institutional quality and its interaction with terms of trade volatility into the regression do not affect the findings of the study.