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Macroeconomic Fluctuations in Emerging Economies: An Unobserved Components Approach

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We employ a multivariate correlated unobserved components model to investigate the interaction between the permanent and transitory movements in output for two groups of emerging economies: one group in Asia and the other in Latin America. Our empirical framework enables us to assess the relative importance of permanent versus transitory shocks in driving output growth rate correlations across countries, providing an alternative to dynamic factor models for analyzing international co-movements. Our results suggest that GDP in all the emerging economies have highly variable stochastic permanent components with innovations that are negatively correlated with their respective transitory movements. We also find that the Asian countries in our sample share a significant fraction of innovations to output whereas output disturbances are largely idiosyncratic for the Latin American countries. These results lead us to conclude that Asia may be a plausible candidate for a monetary union, whereas Latin American countries do not seem similar enough in terms of macroeconomic fluctuations to gain from sharing a common currency.

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Paper provided by School of Economics, University of Queensland, Australia in its series MRG Discussion Paper Series with number 3911.

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Handle: RePEc:qld:uqmrg6:39

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  1. Alexander W. Hoffmaister & Jorge Roldos, 1997. "Are Business Cycles Different in Asia and Latin America?," IMF Working Papers 97/9, International Monetary Fund.
  2. Calderon, Cesar & Fuentes, Rodrigo, 2010. "Characterizing the business cycles of emerging economies," Policy Research Working Paper Series 5343, The World Bank.
  3. Sunghyun Henry Kim & M. Ayhan Kose & Michael G. Plummer, 2003. "Dynamics of Business Cycles in Asia: Differences and Similarities," Review of Development Economics, Wiley Blackwell, vol. 7(3), pages 462-477, 08.
  4. Allan W. Gregory & Allen C. Head & Jacques Raynauld, 1994. "Measuring World Business Cycles," Working Papers 902, Queen's University, Department of Economics.
  5. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries," IMF Working Papers 99/35, International Monetary Fund.
  6. Ronald McKinnon & Gunther Schnabl, 2002. "Synchronized Business Cycles in East Asia: Fluctuations in the Yen/Dollar Exchange Rate and China’s Stabilizing Role," Working Papers 02010, Stanford University, Department of Economics.
  7. Don Harding & Adrian Pagan, 2000. "Disecting the Cycle: A Methodological Investigation," Econometric Society World Congress 2000 Contributed Papers 1164, Econometric Society.
  8. Claudio H. Dos Santos & Anwar M. Shaikh & Gennaro Zezza, 2003. "Measures of the Real GDP of U.S. Trading Partners: Methodology and Results," International Trade 0309021, EconWPA.
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