External Terms of Trade and Construction-Sector Performance in a Small Open Economy: Evidence from Peru

This study examines whether external terms of trade (TOT) maintain a long-run equilibrium relationship with the real GDP of Peru’s construction sector and whether sectoral activity adjusts when deviations from that equilibrium arise. Construction holds substantial economic and social importance in Peru through its close links with investment, employment, infrastructure development, and domestic economic activity. Despite this relevance, empirical evidence on the long-run relationship and adjustment dynamics between external TOT and construction-sector performance remains scarce, particularly for Peru. To address this gap, the study applies Johansen cointegration and a Vector Error Correction Model (VECM) to quarterly data for 2002–2025, incorporating gross fixed capital formation as a control and seasonal effects. Under the selected baseline specification, the results identify one cointegrating relationship, although this evidence is sensitive to the lag-order specification. Construction GDP exhibits a negative and statistically significant error-correction coefficient, with approximately 31% of the preceding disequilibrium corrected within one quarter. In contrast, TOT shows no significant error-correction response, while the weak-exogeneity test supports its role as an external condition within the system. No statistically significant association is identified between lagged TOT changes and construction GDP at the individual short-run lags considered. The findings therefore reveal an asymmetric adjustment process in which construction activity participates in restoring long-run equilibrium while TOT remains weakly exogenous.