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Business Cycles in Emerging Markets

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  • International Monetary Fund

Abstract

This paper examines how durable goods and financial frictions shape the business cycle of a small open economy subject to shocks to trend and transitory shocks. In the data, nondurable consumption is not as volatile as income for both developed and emerging market economies. The simulation of the model implies that shocks to trend play a less important role than previously documented. Financial frictions improve the ability of the model to match some key business cycle properties of emerging economies. A countercyclical borrowing premium interacts with the nature of durable goods delivering highly volatile consumption and very countercyclical net exports.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/133.

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Length: 38
Date of creation: 01 Jun 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/133

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Keywords: Emerging markets; Consumer goods; Economic models; External shocks; business cycles; total consumption; business cycle; consumption expenditure; nondurable goods; nondurable consumption; consumption spending; real business cycles; permanent income; consumption goods; consumer durables; general equilibrium; consumption volatility; capital income; real business cycle; neoclassical growth model; private consumption; gross domestic product; growth model; consumption of durable goods; permanent income hypothesis; consumption relative; capital accumulation; total expenditure; consumption fluctuations; properties of business cycles; nondurables consumption; consumption smoothing; growth rate; real interest rate; response of consumption; investment in capital; income process; aggregate consumption; current consumption; private consumption expenditure;

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References

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  1. Emine Boz & Christian Daude & C. Bora Durdu, 2011. "Emerging Market Business Cycles Revisited: Learning about the Trend," Koç University-TUSIAD Economic Research Forum Working Papers, Koc University-TUSIAD Economic Research Forum 1110, Koc University-TUSIAD Economic Research Forum.
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  13. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
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  16. Reinhart, Carmen & Ogaki, Masao, 1995. "Measuring intertemporal substitution: The role of durable goods," MPRA Paper 13690, University Library of Munich, Germany.
  17. Carlos de Resende, 2006. "Endogenous Borrowing Constraints and Consumption Volatility in a Small Open Economy," Working Papers, Bank of Canada 06-37, Bank of Canada.
  18. Ricardo J. Caballero, 1991. "Durable Goods: An Explanation for Their Slow Adjustment," NBER Working Papers 3748, National Bureau of Economic Research, Inc.
  19. De Gregorio, Jose & Guidotti, Pablo E & Vegh, Carlos A, 1998. "Inflation Stabilisation and the Consumption of Durable Goods," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(446), pages 105-31, January.
  20. Bertrand Gruss & Karel Mertens, 2009. "Regime Switching Interest Rates and Fluctuations in Emerging Markets," Economics Working Papers, European University Institute ECO2009/22, European University Institute.
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  22. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(2), pages 289-309, April.
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Citations

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Cited by:
  1. Zeng, Jhih-Hong & Peng, Chi-Lu & Chen, Ming-Chi & Lee, Chien-Chiang, 2013. "Wealth effects on the housing markets: Do market liquidity and market states matter?," Economic Modelling, Elsevier, Elsevier, vol. 32(C), pages 488-495.
  2. Juan Carlos Hatchondo & Francisco Roch & Leonardo Martinez, 2012. "Fiscal Rules and the Sovereign Default Premium," IMF Working Papers 12/30, International Monetary Fund.
  3. Álvarez-Parra, Fernando & Brandao-Marques, Luis & Toledo, Manuel, 2013. "Durable goods, financial frictions, and business cycles in emerging economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(6), pages 720-736.

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