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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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Postal: International Monetary Fund, Washington, DC USA
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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. Carlos de Resende, 2006. "Endogenous Borrowing Constraints and Consumption Volatility in a Small Open Economy," Working Papers 06-37, Bank of Canada.
  2. Ricardo J. Caballero, 1991. "Durable Goods: An Explanation for Their Slow Adjustment," NBER Working Papers 3748, National Bureau of Economic Research, Inc.
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  16. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  17. Joao F. Gomes & Leonid Kogan & Motohiro Yogo, 2007. "Durability of Output and Expected Stock Returns," NBER Working Papers 12986, National Bureau of Economic Research, Inc.
  18. Andreas Hornstein & Jack Praschnik, 1997. "Intermediate inputs and sectoral comovement in the business cycle," Working Paper 97-06, Federal Reserve Bank of Richmond.
  19. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  20. Bertrand Gruss & Karel Mertens, 2009. "Regime Switching Interest Rates and Fluctuations in Emerging Markets," Economics Working Papers ECO2009/22, European University Institute.
  21. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  22. Michael A. Kouparitsas, 1998. "Dynamic trade liberalization analysis: steady state, transitional and inter-industry effects," Working Paper Series WP-98-15, Federal Reserve Bank of Chicago.
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Citations

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Cited by:
  1. Juan Carlos Hatchondo & Leonardo Martinez & Francisco Roch, 2012. "Fiscal rules and the sovereign default premium," Working Paper 12-01, Federal Reserve Bank of Richmond.
  2. 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, vol. 32(C), pages 488-495.
  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, vol. 60(6), pages 720-736.

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