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Financial market participation and the developing country business cycle

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  • Özbilgin, H. Murat

Abstract

I explore the implications of limited participation in financial markets on a standard small open economy business cycle model. Despite its parsimony, the limited participation model developed in this paper improves over the standard model in terms of explaining two important features of business cycle facts of developing countries: high volatility of consumption, and high negative correlation between the trade balance and output. Limited participation model is then used to inspect the effects of financial development and integration on macroeconomic volatility. Under a standard calibration, limited participation model leads to the conclusion that financial development and integration are associated with higher investment and output volatility. Effect of more participation on consumption volatility is dependent on the specification of the risk premium function.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 92 (2010)
Issue (Month): 2 (July)
Pages: 125-137

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Handle: RePEc:eee:deveco:v:92:y:2010:i:2:p:125-137

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Web page: http://www.elsevier.com/locate/devec

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Keywords: Small open economy Business cycles Financial integration Financial development Developing countries;

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Citations

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Cited by:
  1. Amdur, David & Ersal Kiziler, Eylem, 2012. "Trend shocks and the countercyclical U.S. current account," MPRA Paper 40147, University Library of Munich, Germany.
  2. repec:eee:deveco:v:99:y:2012:i:2:p:358-369 is not listed on IDEAS
  3. Naoussi, Claude Francis & Tripier, Fabien, 2013. "Trend shocks and economic development," Journal of Development Economics, Elsevier, Elsevier, vol. 103(C), pages 29-42.
  4. H. Murat Ozbilgin, 2010. "Welfare Gains from Disinflation in an Economy With Currency Substitution (Para Ikamesinin Oldugu Bir Ekonomide Enflasyonun Dusurulmesinden Kaynaklanan Refah Kazanimlari)," Working Papers 1009, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  5. Rodolfo Cermeño & Last: Cermeño & María José Roa & Last: Roa, 2013. "Desarrollo financiero, crecimiento y volatidad: Revisión de la literatura reciente," Documentos de Investigación - Research Papers 9, Centro de Estudios Monetarios Latinoamericanos, CEMLA.
  6. Harun Alp & Yusuf Soner Baskaya & Mustafa Kilinc & Canan Yuksel, 2012. "Stylized Facts for Business Cycles in Turkey," Working Papers 1202, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.

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