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“Tropical” Real Business Cycles? A Bayesian Exploration



Can frictionless small open economy models drivensolely by technology shocks account for businesscycles in developing countries? We do not find evidenceof it. We build a DSGE model that jointly includesa variety of real perturbations in addition totechnology shocks, such as procyclical fiscal policies,terms of trade fluctuations, and perturbationsto the foreign interest rate coupled with financialfrictions. We estimate it using Bayesian methodson high and low frequency data from a developing-and tropical"- country, Colombia. We findinterest rate shocks to be crucial and that financialfrictions play a central role as propagating mechanismsof transitory technology shocks. These twodriving forces alone can account well for the observedproperties of the Colombian business cycle.Other structural shocks, such as terms of trade fluctuationsand level shifts in the technology process,do not appear to be relevant in the past decade anda half, but their importance increases when a longerspan of data is considered."

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Volume (Year): 28 (2010)
Issue (Month): 61 (August)
Pages: 60-105

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Handle: RePEc:col:000107:008320
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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  2. Finn E. Kydland & Carlos E.J.M. Zarazaga, 2001. "Argentina's lost decade," Center for Latin America Working Papers 0401, Federal Reserve Bank of Dallas.
  3. David N. DeJong & Chetan Dave, 2007. "Implementing Nonlinear Appoximations Empirically, from Structural Macroeconometrics
    [Structural Macroeconometrics]
    ," Introductory Chapters, Princeton University Press.
  4. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "Af1uencia de capital y apreciacion del tipo de cambio real en America Latina: E1 papel de los factores externos
    [Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of Ex
    ," MPRA Paper 13681, University Library of Munich, Germany.
  5. Rand, John & Tarp, Finn, 2001. "Business Cycles in Developing Countries: Are They Different?," MPRA Paper 62445, University Library of Munich, Germany.
  6. David N. DeJong & Chetan Dave, 2007. "Introduction to Structural Macroeconometrics
    [Structural Macroeconometrics]
    ," Introductory Chapters, Princeton University Press.
  7. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  8. Reinhart, Carmen & Vegh, Carlos, 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," MPRA Paper 13898, University Library of Munich, Germany.
  9. Finn E. Kydland & Carlos E. J. M. Zarazaga, 2002. "Online Appendix to Argentina's Lost Decade and the Subsequent Recovery Puzzle," Technical Appendices kydland02, Review of Economic Dynamics.
  10. Talvi, Ernesto & Vegh, Carlos A., 2005. "Tax base variability and procyclical fiscal policy in developing countries," Journal of Development Economics, Elsevier, vol. 78(1), pages 156-190, October.
  11. Javier García-Cicco & Roberto Pancrazi & Martín Uribe, 2006. "Real Business Cycles in Emerging Countries?," NBER Working Papers 12629, National Bureau of Economic Research, Inc.
  12. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
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