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Medium Term Business Cycles in Developing Countries

Author Info

Listed author(s):
  • Diego A. Comin

    ()

    (Harvard Business School, Business, Government and the International Economy Unit)

  • Norman Loayza

    ()

    (Economics Research, World Bank Group)

  • Farooq Pasha

    ()

    (Boston College, Economics)

  • Luis Serven

    ()

    (World Bank - Office of the Chief Economist)

Abstract

We build a two country asymmetric DSGE model with two features: (i) endogenous and slow diffusion of technologies from the developed to the developing country, and (ii) adjustment costs to investment flows. We calibrate the model to match the Mexico-U.S. trade and FDI flows. The model is able to explain the following stylized facts: (i) U.S. and Mexican output co-move more than consumption; (ii) U.S. shocks have a larger effect on Mexico than in the U.S.; (iii) U.S. business cycles lead over medium term fluctuations in Mexico; (iv) Mexican consumption is more volatile than output.

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File URL: http://www.hbs.edu/research/pdf/10-029.pdf
File Function: Revised version, 2010
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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 10-029.

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Length: 54 pages
Date of creation: Oct 2009
Date of revision: Sep 2010
Handle: RePEc:hbs:wpaper:10-029
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Keywords: Business Cycles in Developing Countries; Co-movement between Developed and Developing economies; Volatility; Extensive Margin of Trade; Product Life Cycle; FDI.;

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Find related papers by JEL classification:
  • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
  • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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  1. Andrew B. Bernard & J. Bradford Jensen & Stephen J. Redding & Peter K. Schott, 2007. "Firms in International Trade," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 105-130, Summer.
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  3. Greenwood, Jeremy & Yorukoglu, Mehmet, 1997. "1974," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46(1), pages 49-95, June.
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  4. Warner, Andrew M., 1994. "Mexico's investment collapse: debt or oil?," Journal of International Money and Finance, Elsevier, vol. 13(2), pages 239-256, April.
  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. Sanghamitra Das & Mark J. Roberts & James R. Tybout, 2007. "Market Entry Costs, Producer Heterogeneity, and Export Dynamics," Econometrica, Econometric Society, vol. 75(3), pages 837-873, 05.
  7. R. Gaston Gelos & Alberto Isgut, 2001. "Fixed Capital Adjustment: Is Latin America Different?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 717-726, November.
  8. Nancy L. Stokey, 1991. "The Volume and Composition of Trade Between Rich and Poor Countries," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 63-80.
  9. R. G Gelos & Alberto Isgut, 1999. "Fixed Capital Adjustment; Is Latin America Different? Evidence from the Colombian and Mexican Manufacturing Sectors," IMF Working Papers 99/59, International Monetary Fund.
  10. Andrew M. Warner, 1992. "Did the Debt Crisis Cause the Investment Crisis?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1161-1186.
  11. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 35-54, November.
  12. Greenwood, Jeremy & Hercowitz, Zvi & Krusell, Per, 1997. "Long-Run Implications of Investment-Specific Technological Change," American Economic Review, American Economic Association, vol. 87(3), pages 342-362, June.
  13. 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.
  14. Iscan, Talan B, 2000. "Financing Constraints and Investment Decline in Mexico," Manchester School, University of Manchester, vol. 68(1), pages 24-43, January.
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