The aim of this study is twofold. First, an elaboration of how the exchange rate policy influences the ability of a country to absorb fluctuations in terms of trade is examined. Second, an outline is given of how changes in terms of trade affected Botswana's output growth under the current exchange rate policy framework. The consensus in the literature is that countries with a flexible exchange rate policy experience a milder contraction in output than their counterparts with fixed exchange rate regimes when export prices decline.

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