We investigate the hypothesis that an RBC model driven by permanent and transitory productivity shocks can explain well observed business-cycle fluctuations in emerging countries. A drawback of existing studies is the use of short samples to identify permanent shifts in productivity. We overcome this difficulty by using more than one century of Argentine data to estimate the structural parameters of a small-open-economy RBC model. We place particular emphasis on the behavior of the trade balance because this variable plays a central role in all existing empirical or theoretical characterizations of the developing-country business-cycle. We find that the RBC model predicts a near random walk behavior for the trade balance-to-output ratio with a flat autocorrelation function close to unity. By contrast, in the data, the autocorrelation function of the trade balance-to-output ratio is significantly below unity and converges quickly to zero, resembling the one implied by a stationary autoregressive process. In addition, we show that the RBC model fails to capture a number of other important aspects of the emerging-market business cycle, including the volatilities of output, consumption, investment, and the trade balance.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
12629.
Length: Date of creation: Oct 2006 Date of revision: Handle: RePEc:nbr:nberwo:12629
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Find related papers by JEL classification: F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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Finn E. Kydland & Carlos E. J. M. Zarazaga, 2002.
"Argentina's Lost Decade,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 152-165, January.
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