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Medium Term Business Cycles in Developing Countries

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Author Info

  • Diego A. Comin

    ()
    (Harvard Business School, Business, Government and the International Economy Unit)

  • Norman Loayza

    ()
    (Economics Research, World Bank Group)

  • Farooq Pasha

    ()
    (Boston College, Economics)

  • Luis Serven

    ()
    (World Bank - Office of the Chief Economist)

Abstract

We build a two country asymmetric DSGE model with two features: (i) endogenous and slow diffusion of technologies from the developed to the developing country, and (ii) adjustment costs to investment flows. We calibrate the model to match the Mexico-U.S. trade and FDI flows. The model is able to explain the following stylized facts: (i) U.S. and Mexican output co-move more than consumption; (ii) U.S. shocks have a larger effect on Mexico than in the U.S.; (iii) U.S. business cycles lead over medium term fluctuations in Mexico; (iv) Mexican consumption is more volatile than output.

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File Function: Revised version, 2010
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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-029.

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Length: 54 pages
Date of creation: Oct 2009
Date of revision: Sep 2010
Handle: RePEc:hbs:wpaper:10-029

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Keywords: Business Cycles in Developing Countries; Co-movement between Developed and Developing economies; Volatility; Extensive Margin of Trade; Product Life Cycle; FDI.;

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References

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  1. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2001. "Market entry costs, producer heterogeneity and export dynamics," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 03-10, Indian Statistical Institute, New Delhi, India.
  2. Fabio Ghironi & Marc J. Melitz, 2004. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," NBER Working Papers 10540, National Bureau of Economic Research, Inc.
  3. Neumeyer, Pablo Andrés & Perri, Fabrizio, 2004. "Business Cycles in Emerging Economies: The Role of Interest Rates," CEPR Discussion Papers 4482, C.E.P.R. Discussion Papers.
  4. Iscan, Talan B, 2000. "Financing Constraints and Investment Decline in Mexico," Manchester School, University of Manchester, vol. 68(1), pages 24-43, January.
  5. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130, Summer.
  6. Warner, Andrew M., 1994. "Mexico's investment collapse: debt or oil?," Journal of International Money and Finance, Elsevier, vol. 13(2), pages 239-256, April.
  7. Andrew M. Warner, 1991. "Did the debt crisis cause the investment crisis?," International Finance Discussion Papers 418, Board of Governors of the Federal Reserve System (U.S.).
  8. Gaston Gelos & Alberto Isgut, 1999. "Fixed Capital Adjustment," IMF Working Papers 99/59, International Monetary Fund.
  9. Nancy L. Stokey, 1989. "The Volume and Composition of Trade Between Rich and Poor Countries," Discussion Papers 849, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Greenwood, J. & Hercowitz, Z. & Krusell, P., 1996. "Long-Run Implications of Investment-Specific Technological Change," RCER Working Papers 420, University of Rochester - Center for Economic Research (RCER).
  11. R. Gaston Gelos & Alberto Isgut, 2001. "Fixed Capital Adjustment: Is Latin America Different?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 717-726, November.
  12. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  13. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
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Citations

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Cited by:
  1. Diego Comin & Martí Mestieri, 2013. "Technology Diffusion: Measurement, Causes and Consequences," INET Research Notes 29, Institute for New Economic Thinking (INET).
  2. Choudhary, M. Ali & Hanif, M. Nadim & Khan, Sajawal & Rehman, Muhammad, 2010. "Procyclical Monetary Policy and Governance," MPRA Paper 27022, University Library of Munich, Germany.
  3. Wei Liao & Ana Maria Santacreu, 2012. "The Trade Comovement Puzzle and the Margins of International Trade," Working Papers 042012, Hong Kong Institute for Monetary Research.
  4. Asli Leblebicioglu & Kolver Hernandez, 2012. "The Transmission of US Shocks to Emerging Markets," 2012 Meeting Papers 316, Society for Economic Dynamics.
  5. Ana Santacreu, 2012. "The Trade Comovement Puzzle and the Margins of International Trade," 2012 Meeting Papers 34, Society for Economic Dynamics.
  6. Paul Levine, 2012. "Policy focus: Monetary policy in an uncertain world: probability models and the design of robust monetary rules," Indian Growth and Development Review, Emerald Group Publishing, vol. 5(1), pages 70-88, April.
  7. Correa-López Mónica & de Blas Beatriz, 2012. "International Transmission of Medium-Term Technology Cycles: Evidence from Spain as a Recipient Country," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-52, November.
  8. Kadish, Peter, 2010. "Are Large Multinational Companies Undervalued? Emerging Markets Perspective," MPRA Paper 24315, University Library of Munich, Germany.
  9. Queraltó, Albert, 2013. "A Model of Slow Recoveries from Financial Crises," International Finance Discussion Papers 1097, Board of Governors of the Federal Reserve System (U.S.).

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