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Trend Shocks and Financial Frictions in Small Open Economies Modeling

Author

Listed:
  • Alberto Ortiz Bolaños

    (Centro de Estudios Monetarios Latinoamericanos y EGADE Business del Tecnológico de Monterrey)

  • Jacob Wishart

    (Oberlin College)

Abstract

This paper studies the relative importance of including trend shocks and financial frictions whwn characterizing economic flutuations in a set of 12 emerging developed small open economies. We find that trend shocks, captured by permanet technology innovations, are relatively more important than transtory shocks in emerging market economies expanding the two-country (Canada and Mexico) evidence in Aguiar and Gopinath (2007). We also find that adding financial frictions improves the fit of the model in all the studied emerging market economies, but only in 5 developed small open economies, expanding the two-country (Argentina-Mexico) evidence in García-Cicco et al. (2010). In the process of comparing models, we provide a set parameter estimates for a large set of countries that could serve as a guide for future studies.

Suggested Citation

  • Alberto Ortiz Bolaños & Jacob Wishart, 2012. "Trend Shocks and Financial Frictions in Small Open Economies Modeling," Documentos de Investigación - Research Papers 5, CEMLA.
    • Handle: RePEc:cml:docinv:5
    as

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    References listed on IDEAS

    as
    1. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models—Rejoinder," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 211-219.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    3. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
    4. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
    5. Sungbae An & Frank Schorfheide, 2007. "Bayesian Analysis of DSGE Models," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 113-172.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Hilary Patroba & Leroi Raputsoane, 2016. "South Africa's real business cycles: The cycle is the trend," Working Papers 12/2016, Stellenbosch University, Department of Economics.
    2. Letendre, Marc-André & Obaid, Sabreena, 2020. "Emerging economy business cycles: Interest rate shocks vs trend shocks," Economic Modelling, Elsevier, vol. 93(C), pages 526-545.
    3. Marc-Andre Letendre & Sabreena Obaid, 2019. "Emerging Economy Business Cycles: Interest Rate Shocks vs Trend Shocks," Department of Economics Working Papers 2019-07, McMaster University.
    4. Hüseyin Taştan & Bekir Aşık, 2014. "A Bayesian Estimation of Real Business-Cycle Models for the Turkish Economy," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 3(2), pages 27-50, May.

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    More about this item

    Keywords

    Small Open Economy Models; Economic Flutations; Trend Shocks; Financial Frictions; Structural Estimation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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