IDEAS home Printed from https://ideas.repec.org/a/kap/openec/v28y2017i4d10.1007_s11079-017-9440-5.html
   My bibliography  Save this article

How Do Emerging Markets Respond to Macroeconomic Shocks? - Dynamic Panel Evidence on the Effects of Disasters

Author

Listed:
  • Yabin Wang

    () (Williams College)

Abstract

Business cycles in emerging markets are characterized by several features that seem difficult to reconcile with consumption smoothing, such as volatile consumption and strongly countercyclical current accounts. Although there are several alternative approaches trying to explain business cycles in emerging markets by modeling different shocks and transmission mechanisms, there is little direct evidence about exogenous shocks and their transmission in emerging markets. Using a newly constructed dataset on disaster events, I test how emerging markets respond to actual exogenous shocks in a dynamic panel distributed lag model. This approach allows me to identify the dynamic effects of shocks on macroeconomic variables while controlling for unobserved global shocks, unobserved time invariant characteristics of different countries and the possible serial correlations in macroeconomic aggregates. My results show that political shocks and terrorist attacks can drive business cycles in emerging markets, having a significant and long-lasting negative effect on output and the domestic components of aggregate absorption. I also test whether savings, investments and the current account respond to these shocks as suggested by forward-looking models.

Suggested Citation

  • Yabin Wang, 2017. "How Do Emerging Markets Respond to Macroeconomic Shocks? - Dynamic Panel Evidence on the Effects of Disasters," Open Economies Review, Springer, vol. 28(4), pages 731-760, September.
  • Handle: RePEc:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-017-9440-5
    DOI: 10.1007/s11079-017-9440-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11079-017-9440-5
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    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. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
    2. Rabah Arezki & Valerie A. Ramey & Liugang Sheng, 2017. "News Shocks in Open Economies: Evidence from Giant Oil Discoveries," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 103-155.
    3. Emine Boz & C. Bora Durdu & Nan Li, 2015. "Emerging Market Business Cycles: The Role of Labor Market Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 31-72, February.
    4. 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.
    5. 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.
    6. John C. Bluedorn, 2005. "Hurricanes: Intertemporal Trade and Capital Shocks," Economics Series Working Papers 241, University of Oxford, Department of Economics.
    7. Hutchison, Michael M. & Noy, Ilan, 2006. "Sudden stops and the Mexican wave: Currency crises, capital flow reversals and output loss in emerging markets," Journal of Development Economics, Elsevier, vol. 79(1), pages 225-248, February.
    8. Scott R. Baker & Nicholas Bloom, 2013. "Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments," NBER Working Papers 19475, National Bureau of Economic Research, Inc.
    9. Boz, Emine & Daude, Christian & Bora Durdu, C., 2011. "Emerging market business cycles: Learning about the trend," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 616-631.
    10. 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.
    11. Eduardo Cavallo & Sebastian Galiani & Ilan Noy & Juan Pantano, 2013. "Catastrophic Natural Disasters and Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1549-1561, December.
    12. 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.
    13. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    14. Emine Boz & Christian Daude & Ceyhun 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.).
    15. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    16. Sheffrin, Steven M. & Woo, Wing Thye, 1990. "Present value tests of an intertemporal model of the current account," Journal of International Economics, Elsevier, vol. 29(3-4), pages 237-253, November.
    17. Alberto Bagnai & Stefano Manzocchi, 1999. "Current-Account Reversals in Developing Countries: The Role of Fundamentals," Open Economies Review, Springer, vol. 10(2), pages 143-163, May.
    18. Pagano, Marcello & Hartley, Michael J., 1981. "On fitting distributed lag models subject to polynomial restrictions," Journal of Econometrics, Elsevier, vol. 16(2), pages 171-198, June.
    19. Nason, James M. & Rogers, John H., 2006. "The present-value model of the current account has been rejected: Round up the usual suspects," Journal of International Economics, Elsevier, vol. 68(1), pages 159-187, January.
    20. Paul Cashin & C. McDermott, 2002. "Terms of Trade Shocks and the Current Account: Evidence from Five Industrial Countries," Open Economies Review, Springer, vol. 13(3), pages 219-235, July.
    21. Bernardina Algieri & Thierry Bracke, 2011. "Patterns of Current Account Adjustment—Insights from Past Experience," Open Economies Review, Springer, vol. 22(3), pages 401-425, July.
    Full references (including those not matched with items on IDEAS)

    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. 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.
    2. Van Nguyen, Phuong, 2020. "The Vietnamese business cycle in an estimated small open economy New Keynesian DSGE model," Dynare Working Papers 56, CEPREMAP.
    3. C. Bora Durdu, 2013. "Emerging Market Business Cycles: Recent Advances," International Economic Journal, Taylor & Francis Journals, vol. 27(2), pages 183-199, June.
    4. Bauducco, Sofia & Caprioli, Francesco, 2014. "Optimal fiscal policy in a small open economy with limited commitment," Journal of International Economics, Elsevier, vol. 93(2), pages 302-315.
    5. 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.
    6. 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).
    7. 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.
    8. 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.
    9. Michaud, Amanda & Rothert, Jacek, 2018. "Redistributive fiscal policies and business cycles in emerging economies," Journal of International Economics, Elsevier, vol. 112(C), pages 123-133.
    10. Demian Pouzo & Ignacio Presno, 2012. "Sovereign default risk and uncertainty premia," Working Papers 12-11, Federal Reserve Bank of Boston.
    11. 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.
    12. Akıncı, Özge, 2013. "Global financial conditions, country spreads and macroeconomic fluctuations in emerging countries," Journal of International Economics, Elsevier, vol. 91(2), pages 358-371.
    13. Emine Boz & Ceyhun Bora Durdu & Nan Li, 2009. "Labor market search in emerging economies," International Finance Discussion Papers 989, Board of Governors of the Federal Reserve System (U.S.).
    14. Germaschewski, Yin & Horvath, Jaroslav & Rubini, Loris, 2021. "Property rights, expropriations, and business cycles in China," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    15. Emine Boz & C. Bora Durdu & Nan Li, 2015. "Emerging Market Business Cycles: The Role of Labor Market Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(1), pages 31-72, February.
    16. 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.
    17. Caballero, Julián & Fernández, Andrés & Park, Jongho, 2019. "On corporate borrowing, credit spreads and economic activity in emerging economies: An empirical investigation," Journal of International Economics, Elsevier, vol. 118(C), pages 160-178.
    18. 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.
    19. Marchesi, Silvia & Masi, Tania, 2021. "Life after default. Private and official deals," Journal of International Money and Finance, Elsevier, vol. 113(C).
    20. Roberto Duncan, 2015. "Simple Models to Understand and Teach Business Cycle Macroeconomics for Emerging Market and Developing Economies," Working Papers 2015-49, Peruvian Economic Association.

    More about this item

    Keywords

    Intertemporal approach to the current account; Disasters; Emerging markets; Business cycles;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    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:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-017-9440-5. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Springer Nature Abstracting and Indexing). General contact details of provider: http://www.springer.com .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.