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Developing Country Business Cycles: Revisiting the Stylised Facts

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  • Rachel Male

    ()
    (Queen Mary, University of London)

Abstract

Identifying business cycle stylised facts is essential as these often form the basis for the construction and validation of theoretical business cycle models. Furthermore, understanding the cyclical patterns in economic activity, and their causes, is important to the decisions of both policymakers and market participants. Previous analyses of developing country stylised facts have tended to feature only small samples, for example the seminal paper by Ag�nor et al. (2000) considers just twelve middle-income economies. Consequently, unlike for the industrialised countries, there is not a consistent set of developing country business cycle stylised facts. Motivated by importance of these business cycle statistics, this paper makes an important contribution to the literature by extending and generalising the developing country stylised facts for a sample of thirty-two developing countries. In particular, it is found that real interest rates are, on average, weakly procyclical in developing countries, not countercyclical as previously reported; this holds only for the Latin American economies. There is evidence that money leads the cycle in numerous developing economies, and thus that monetary shocks are an important source of business cycle fluctuations. However domestic credit, which is thought to fulfil an important role in determining investment, and hence economic activity, in developing economies, is found to lag, rather than lead, the cycle, thus implying that fluctuations in output influence credit rather than credit influencing the business cycle. A final key empirical finding is that developing country business cycles are characterised by significantly persistent output fluctuations; however, the magnitude of this persistence is somewhat lower than for the developed countries. Furthermore, prices and nominal wages are found to be significantly persistent in almost all of the developing countries. This finding is particularly important, because it justifies the use of theoretical models with staggered prices and wages for the modelling of developing country business cycles.

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Paper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 664.

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Date of creation: May 2010
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Handle: RePEc:qmw:qmwecw:wp664

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Keywords: Business cycle; Developing economies; Stylised facts; Volatility; Persistence; Cross-correlations;

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  1. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2000. "Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?," NBER Working Papers 7869, National Bureau of Economic Research, Inc.
  2. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research, Working Paper Series qt0sx02651, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  3. David K. Backus & Patrick J. Kehoe, 1992. "International Evidence on the Historical Properties of Business Cycles," Working Papers 92-5, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Stephane Pallage & Michel Robe, 1998. "Foreign Aid and the Business Cycle," Cahiers de recherche CREFE / CREFE Working Papers 63, CREFE, Université du Québec à Montréal.
  5. Bulir, Ales & Hamann, A. Javier, 2001. "How Volatile and Unpredictable are Aid Flows, and What are the Policy Implications?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Rachel Male, 2010. "Developing Country Business Cycles: Characterising the Cycle," Working Papers 663, Queen Mary, University of London, School of Economics and Finance.
  7. Marianne Baxter & Robert G. King, 1999. "Measuring Business Cycles: Approximate Band-Pass Filters For Economic Time Series," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 575-593, November.
  8. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
  9. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
  10. Sims, Christopher A, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," American Economic Review, American Economic Association, vol. 70(2), pages 250-57, May.
  11. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
  12. 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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Cited by:
  1. Rachel Male, 2010. "Business Cycle Persistence in Developing Countries: How Successful is a DSGE Model with a Vertical Production Chain and Sticky Prices?," Working Papers 672, Queen Mary, University of London, School of Economics and Finance.
  2. Ghate, Chetan & Pandey, Radhika & Patnaik, Ila, 2011. "Has India emerged? Business cycle facts from a transitioning economy," Working Papers 11/88, National Institute of Public Finance and Policy.
  3. Ciprian Chirilă & Viorica Chirilă, 2012. "Unemployment And Business Cycles In Central And Eastern European Countries," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 486-493, November.
  4. Chetan Ghate & Radhika Pandey & Ila Patnaik, 2011. "Has India emerged? Business cycle stylized facts from a transitioning economy," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 11-05, Indian Statistical Institute, New Delhi, India.
  5. Edit V. Velenyi & Marc F. Smitz, 2014. "Cyclical Patterns in Government Health Expenditures Between 1995 and 2010," Health, Nutrition and Population (HNP) Discussion Paper Series 87885, The World Bank.
  6. Bjarni G. Einarsson & Gudjón Emilsson & Svava J. Haraldsdóttir & Thórarinn G. Pétursson & Rósa B. Sveinsdóttir, 2013. "On our own? The Icelandic business cycle in an international context," Economics wp63, Department of Economics, Central bank of Iceland.

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