Abstract: In this paper a DSGE model and the SV-TVP-FAVAR model will be constructed, with terms of trade to carry out theoretical simulation research and empirical analysis on the macroeconomic effects of changes in China's terms of trade. It is revealed in the result that: (1) The impact of changes in terms of trade on the macroeconomy depends on the level of trade elasticity to a major extent. When trade elasticity is high, although the deterioration of terms of trade helps to promote employment and economic growth, there will be a significant “crowding-out effect” on consumption and investment. (2) The monetary policy objectives have a significant impact on the dynamic transmission mechanism of changes in terms of trade. Monetary policy aimed at stabilizing the price can effectively alleviate the “crowding-out effect” of deteriorating terms of trade on consumption and investment. (3) The impact of the deterioration of China's terms of trade on the macroeconomic variables is significantly different in the short and long term, and also shows significant phase differences in different periods. The output effect and price effect of the deterioration of terms of trade under the new economic normal are relatively small, compared with the two financial crisis periods, and the “crowding-out effect” on consumption and investment has also declined.

Keywords: Terms of Trade; Macroeconomic Effect; DSGE Model; SV-TVP-FAVAR Model.