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The business cycle volatility puzzle: Emerging vs developed economies

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  • Casal, Lucía
  • Guntin, Rafael

Abstract

We study the drivers of business cycle volatility differences between emerging and developed economies. We develop a multisector small open economy framework with heterogeneous firms and production linkages in which firms are subject to sectoral and firm-level TFP shocks and international prices shocks. Using sector-level, firm-level, and international trade data from various developed and emerging economies, we quantify the relevant model-based sufficient statistics. We find that differences in sectoral composition between emerging and developed economies can explain up to 77% of the excessive business cycle volatility in emerging economies, while disparities in the distribution of firms account for up to 9%, and the role of international prices shocks is negligible. Despite the significant influence of sectoral composition, the decrease in volatility observed in emerging economies over the past four decades cannot be attributed to changes in their economic structure.

Suggested Citation

  • Casal, Lucía & Guntin, Rafael, 2025. "The business cycle volatility puzzle: Emerging vs developed economies," Journal of International Economics, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:inecon:v:158:y:2025:i:c:s0022199625001394
    DOI: 10.1016/j.jinteco.2025.104182
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    Keywords

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure

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