Real business cycles in emerging countries: Are Asian business cycles different from Latin American business cycles?

Most previous studies on business cycles in emerging markets have focused on elucidating the differences between advanced and emerging countries. However, the present study investigates the differences in two groups of emerging countries, namely, those in Asia and Latin America. This study first documents that Asian economies are characterized by a higher trade balance share volatility, higher autocorrelations in key macroeconomic variables, higher contributions of trend productivity shocks to fluctuations in key macroeconomic variables, and lower consumption volatility, than Latin American economies. By estimating dynamic stochastic general equilibrium (DSGE) models buffeted with various structural shocks and frictions and performing a counterfactual analysis, this study further suggests the key sources of the differences. First, the first three differences are mainly explained by a higher persistence of trend productivity shocks in Asia than in Latin America. Second, the differences in consumption volatility appear to arise from a higher labor supply elasticity in Asia than in Latin America. We further provide data on policy regime changes and labor markets in both regions to explain the differences in their economic structure. The differences in the contribution of trend productivity shocks in economic fluctuations of the two groups also provide a partial explanation of the discrepancy in the role of trend shocks in past studies.