Trend shocks and business cycles in Sub Saharan Africa
AbstractThis article explores the role of trend shocks in explaining the specificities of business cycles in Sub-Saharan African (SSA) countries using the methodology introduced by Aguiar and Gopinath (2007) [Emerging Market Business Cycles: The Cycle Is the Trend Journal of Political Economy 115(1)]. We specify a small open economy model with transitory and trend shocks on productivity to replicate the differences in the business cycle behavior of output and consumption across countries, especially the excess volatility of consumption in SSA countries. Our results suggest a strong relationship between the weight of trend shocks in the source of fluctuations and economic development. The weight of trend shocks is (i) higher in SSA countries than in emerging and developed countries; (ii) negatively correlated with the level of income, the quality of institutions, and the size of the credit market; and (iii) uncorrelated with the aid received by countries, the ratio of trade-openness, the inflation rate, and government spending.
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Date of creation: 14 Dec 2010
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Business cycle; Permanent shocks; Growth; Africa; Small open economy;
This paper has been announced in the following NEP Reports:
- NEP-AFR-2011-01-03 (Africa)
- NEP-ALL-2011-01-03 (All new papers)
- NEP-DGE-2011-01-03 (Dynamic General Equilibrium)
- NEP-MAC-2011-01-03 (Macroeconomics)
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