Forecasting Export Prices Using Exchange Rates: The Case of Peru

Forecasting terms of trade is an important input to the design of macroeconomic policies and it is even more important in countries like Peru - a small open economy that mostly exports primary inputs. In this paper, we use the methodology applied in Chen, Rogoff and Rossi (2009) to forecast the change in Peruvian export prices using the changes in an exchange rate index of countries that export primary inputs. The results show that these indices have a good predictive power to forecast export prices in Peru. They fare better than other standard forecasting tools such as the autorregresive or random walk models.