Learning-by-doing and business cycles in emerging economies

This paper examines whether learning-by-doing plays an important role in emerging economies. A business cycle model with learning-by-doing is presented and estimated using the data of emerging and developed economies. Its performance is considered from the viewpoint of predictive performance and the business cycle moments focused on in recent studies, namely, high volatility of consumption relative to that of output, and highly countercyclical net exports. The model with learning-by-doing outperforms the trend productivity shocks proposed by Aguiar and Gopinath (J Polit Econ 115(1):69–102, 2007) in predictive performance and it can also replicate the key business cycle moments. This is made possible through enhancing the persistence of productivity shocks and affecting the household’s expectation of permanent income. Further, the model is consistent with the observed relationships between the business cycle moments and growth rates. These results suggest the essential role of learning-by-doing in emerging economies and imply a possible reason for the difference in business cycles in emerging and developed economies.