IDEAS home Printed from https://ideas.repec.org/a/eee/moneco/v60y2013i6p720-736.html
   My bibliography  Save this article

Durable goods, financial frictions, and business cycles in emerging economies

Author

Listed:
  • Álvarez-Parra, Fernando
  • Brandao-Marques, Luis
  • Toledo, Manuel

Abstract

Business cycles in emerging economies display very volatile consumption and strongly countercyclical trade balance. We show that aggregate consumption in these economies is not more volatile than output once durables are accounted for. Then, we present and estimate a real business cycles model for a small open economy that accounts for this empirical observation. Our results show that the role of permanent shocks to aggregate productivity in explaining cyclical fluctuations in emerging economies is considerably lower than previously documented. Moreover, we find that financial frictions are crucial to explain some key business cycle properties of these economies.

Suggested Citation

  • Álvarez-Parra, Fernando & Brandao-Marques, Luis & Toledo, Manuel, 2013. "Durable goods, financial frictions, and business cycles in emerging economies," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 720-736.
    • Handle: RePEc:eee:moneco:v:60:y:2013:i:6:p:720-736
    DOI: 10.1016/j.jmoneco.2013.05.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304393213000809
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmoneco.2013.05.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    2. Javier Garcia-Cicco & Roberto Pancrazi & Martin Uribe, 2010. "Real Business Cycles in Emerging Countries?," American Economic Review, American Economic Association, vol. 100(5), pages 2510-2531, December.
    3. Jesus Fernandez-Villaverde & Pablo Guerron-Quintana & Juan F. Rubio-Ramirez & Martin Uribe, 2011. "Risk Matters: The Real Effects of Volatility Shocks," American Economic Review, American Economic Association, vol. 101(6), pages 2530-2561, October.
    4. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
    5. Neumeyer, Pablo A. & Perri, Fabrizio, 2005. "Business cycles in emerging economies: the role of interest rates," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 345-380, March.
    6. Frank Schorfheide, 2000. "Loss function-based evaluation of DSGE models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 645-670.
    7. Emine Boz & Christian Daude & Bora Durdu, 2008. "Emerging market business cycles revisited: learning about the trend," International Finance Discussion Papers 927, Board of Governors of the Federal Reserve System (U.S.).
    8. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, vol. 83(1), pages 37-52, January.
    9. Carlos De Resende, 2006. "Endogenous Borrowing Constraints and Consumption Volatility in a Small Open Economy," Staff Working Papers 06-37, Bank of Canada.
    10. Jermann, Urban J., 2002. "International portfolio diversification and endogenous labor supply choice," European Economic Review, Elsevier, vol. 46(3), pages 507-522, March.
    11. De Gregorio, Jose & Guidotti, Pablo E & Vegh, Carlos A, 1998. "Inflation Stabilisation and the Consumption of Durable Goods," Economic Journal, Royal Economic Society, vol. 108(446), pages 105-131, January.
    12. João F. Gomes & Leonid Kogan & Motohiro Yogo, 2009. "Durability of Output and Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 117(5), pages 941-986.
    13. International Monetary Fund, 2011. "Business Cycles in Emerging Markets: The Role of Durable Goods and Financial Frictions," IMF Working Papers 2011/133, International Monetary Fund.
    14. Russell W. Cooper & John C. Haltiwanger, 2006. "On the Nature of Capital Adjustment Costs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(3), pages 611-633.
    15. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
    16. Hornstein, Andreas & Praschnik, Jack, 1997. "Intermediate inputs and sectoral comovement in the business cycle," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 573-595, December.
    17. Baxter, Marianne, 1996. "Are Consumer Durables Important for Business Cycles?," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 147-155, February.
    18. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
    19. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    20. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-417, June.
    21. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    22. Gali, Jordi, 1993. "Variability of Durable and Nondurable Consumption: Evidence for Six O.E.C.D. Countries," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 418-428, August.
    23. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    24. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
    25. Bertrand Gruss & Karel Mertens, 2009. "Regime Switching Interest Rates and Fluctuations in Emerging Markets," Economics Working Papers ECO2009/22, European University Institute.
    26. Michael A. Kouparitsas, 1998. "Dynamic trade liberalization analysis: steady state, transitional and inter-industry effects," Working Paper Series WP-98-15, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mădălin Viziniuc, 2017. "Potential Gains from Cooperation Between Monetary and Macroprudential Policies: The Case of an Emerging Economy," Eastern European Economics, Taylor & Francis Journals, vol. 55(5), pages 420-452, September.
    2. Boileau, Martin & Normandin, Michel, 2017. "The price of imported capital and consumption fluctuations in emerging economies," Journal of International Economics, Elsevier, vol. 108(C), pages 67-81.
    3. Letendre, Marc-André & Obaid, Sabreena, 2020. "Emerging economy business cycles: Interest rate shocks vs trend shocks," Economic Modelling, Elsevier, vol. 93(C), pages 526-545.
    4. Wataru Miyamoto & Thuy Lan Nguyen, 2016. "Business Cycles in Small, Open Economies: Evidence from Panel Data Between 1900 and 2013," Staff Working Papers 16-48, Bank of Canada.
    5. Chen, Kuan-Jen & Chu, Angus C. & Lai, Ching-Chong, 2018. "Home production and small open economy business cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 95(C), pages 110-135.
    6. Marc-Andre Letendre & Sabreena Obaid, 2019. "Emerging Economy Business Cycles: Interest Rate Shocks vs Trend Shocks," Department of Economics Working Papers 2019-07, McMaster University.
    7. Pham, Binh Thai & Sala, Hector & Silva, José I., 2020. "Growth and real business cycles in Vietnam and the Asean-5. Does the trend shock matter?," Economic Systems, Elsevier, vol. 44(1).
    8. Juan Carlos Hatchondo & Leonardo Martinez & Yasin Kürsat Önder & Francisco Roch, 2022. "Sovereign Cocos," Working Papers 139, Red Nacional de Investigadores en Economía (RedNIE).
      • Juan Carlos Hatchondo & Mr. Leonardo Martinez & Kursat Onder & Mr. Francisco Roch, 2022. "Sovereign Cocos," IMF Working Papers 2022/078, International Monetary Fund.
    9. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    10. Hatchondo, Juan Carlos & Martinez, Leonardo & Onder, Yasin Kursat, 2017. "Non-defaultable debt and sovereign risk," Journal of International Economics, Elsevier, vol. 105(C), pages 217-229.
    11. Hewei Shen, 2016. "Financial Crises and the Role of Debt Maturity for Emerging Economies," CAEPR Working Papers 2017-012, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    12. Takefumi Yamazaki, 2018. "Financial friction sources in emerging economies: Structural estimation of sovereign default models," Discussion papers ron303, Policy Research Institute, Ministry of Finance Japan.
    13. Wataru Miyamoto & Thuy Lan Nguyen, 2017. "Business Cycles In Small Open Economies: Evidence From Panel Data Between 1900 And 2013," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(3), pages 1007-1044, August.
    14. Aydan Dogan, 2019. "Investment Specific Technology Shocks and Emerging Market Business Cycle Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 202-220, October.
    15. Okubo, Masakatsu, 2023. "Model uncertainty, economic development, and welfare costs of business cycles," Journal of Macroeconomics, Elsevier, vol. 76(C).
    16. Jan-Philipp Dueber, 2018. "Endogenous Time-Varying Volatility and Emerging Market Business Cycles," Studies in Economics 1811, School of Economics, University of Kent.
    17. Aydan Dogan, 2019. "Investment Specific Technology Shocks and Emerging Market Business Cycle Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 202-220, October.
    18. Shin, Wonmun, 2022. "A New angle on excess consumption volatility in emerging countries: Does house price matter?," Journal of International Money and Finance, Elsevier, vol. 124(C).
    19. Hwang, Seolwoong & Kim, Soyoung, 2022. "Real business cycles in emerging countries: Are Asian business cycles different from Latin American business cycles?," Journal of International Money and Finance, Elsevier, vol. 129(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. International Monetary Fund, 2011. "Business Cycles in Emerging Markets: The Role of Durable Goods and Financial Frictions," IMF Working Papers 2011/133, International Monetary Fund.
    2. Guerron-Quintana, Pablo A., 2013. "Common and idiosyncratic disturbances in developed small open economies," Journal of International Economics, Elsevier, vol. 90(1), pages 33-49.
    3. Hernán D. Seoane, 2017. "Markups And The Real Effects Of Volatility Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(3), pages 807-828, August.
    4. Durdu, C. Bora & Nunes, Ricardo & Sapriza, Horacio, 2013. "News and sovereign default risk in small open economies," Journal of International Economics, Elsevier, vol. 91(1), pages 1-17.
    5. Kamalyan, Hayk & Davtyan, Vahagn, 2022. "Exchange Rate Uncertainty and Business Cycle Fluctuations," MPRA Paper 113443, University Library of Munich, Germany.
    6. Nan Li, 2011. "Cyclical Wage Movements in Emerging Markets Compared to Developed Economies: the Role of Interest Rates," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(4), pages 686-704, October.
    7. Echeverria Garaigorta, Paulina Elisa & Iza Padilla, María Amaya, 2011. "Business cycles in a small open economy: The case of Hong Kong," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    8. Roberto Chang & Andrés Fernández, 2013. "On The Sources Of Aggregate Fluctuations In Emerging Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 54(4), pages 1265-1293, November.
    9. Stefan Notz & Peter Rosenkranz, 2014. "Business cycles in emerging markets: the role of liability dollarization and valuation effects," ECON - Working Papers 163, Department of Economics - University of Zurich.
    10. Boileau, Martin & Normandin, Michel, 2017. "The price of imported capital and consumption fluctuations in emerging economies," Journal of International Economics, Elsevier, vol. 108(C), pages 67-81.
    11. Zhao, Yan, 2013. "Borrowing constraints and the trade balance–output comovement," Economic Modelling, Elsevier, vol. 32(C), pages 34-41.
    12. Richard E. Ericson & Xuan Liu, 2012. "Welfare effect of interest rate shocks and policy implications," Applied Financial Economics, Taylor & Francis Journals, vol. 22(22), pages 1899-1917, November.
    13. Horvath, Jaroslav, 2018. "Business cycles, informal economy, and interest rates in emerging countries," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 96-116.
    14. Notz, Stefan & Rosenkranz, Peter, 2021. "Business cycles in emerging markets: The role of liability dollarization and valuation effects," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 424-450.
    15. Jacek Rothert, 2012. "Productivity or Demand? Identifying Sources of Fluctuations in Small Open Economies," 2012 Meeting Papers 187, Society for Economic Dynamics.
    16. C. Bora Durdu, 2013. "Emerging Market Business Cycles: Recent Advances," International Economic Journal, Taylor & Francis Journals, vol. 27(2), pages 183-199, June.
    17. Drechsel, Thomas & Tenreyro, Silvana, 2018. "Commodity booms and busts in emerging economies," Journal of International Economics, Elsevier, vol. 112(C), pages 200-218.
    18. Sangyup Choi & Myungkyu Shim, 2018. "Labor Market Dynamics in Developing Economies: the Role of Subsistence Consumption," Working papers 2018rwp-127, Yonsei University, Yonsei Economics Research Institute.
    19. Mohammad R. Jahan-Parvar & Xuan Liu & Philip Rothman, 2013. "Equity Returns and Business Cycles in Small Open Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1117-1146, September.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:60:y:2013:i:6:p:720-736. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505566 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.