IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Financial Frictions and Business Cycles in Middle-Income Countries

Listed author(s):
  • Jaime Guajardo
Registered author(s):

    A standard DSGE small open economy model can not generate the cyclical regularities of middle-income countries. It predicts excessive consumption smoothing, and procyclical, instead of countercyclical, real net exports. Previous studies have solved this problem by increasing the shocks’ persistence or by lowering the intertemporal elasticity of substitution. This paper tackles the problem by introducing market imperfections relevant for MICs into an otherwise standard model. More specifically, I build a model with limited access to the foreign capital market, identified as an external borrowing constraint, and asymmetric financing opportunities across nontradable and tradable sectors, identified as a sector-specific labor financing wedge. The key parameters associated to these frictions are deduced to replicate selected data for Chile between 1986 and 2004. I find that both frictions are necessary to replicate the cyclical regularities of middle-income countries as they help the model reproduce different features of the data: The external borrowing constraint makes investment and consumption of tradable goods more procyclical and volatile, and makes real net exports countercyclical, while the sector-specific labor financing wedge makes the model reproduce the cyclical moments of work hours and consumption of non tradable goods.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=21623
    Download Restriction: no

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/20.

    as
    in new window

    Length: 61
    Date of creation: 01 Jan 2008
    Handle: RePEc:imf:imfwpa:08/20
    Contact details of provider: Postal:
    International Monetary Fund, Washington, DC USA

    Phone: (202) 623-7000
    Fax: (202) 623-4661
    Web page: http://www.imf.org/external/pubind.htm
    Email:


    More information through EDIRC

    Order Information: Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as
    in new window


    1. Andrew Atkeson & Jose-Victor Rios-Rull, 1996. "The balance of payments and borrowing constraints: an alternative view of the Mexican crisis," Staff Report 212, Federal Reserve Bank of Minneapolis.
    2. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
    3. Mark Aguiar & Gita Gopinath, 2004. "Emerging Market Business Cycles: The Cycle is the Trend," NBER Working Papers 10734, National Bureau of Economic Research, Inc.
    4. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
    5. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    6. Caballero, Ricardo J. & Cowan, Kevin N. & Engel, Eduardo M.R.A. & Micco, Alejandro, 2013. "Effective labor regulation and microeconomic flexibility," Journal of Development Economics, Elsevier, vol. 101(C), pages 92-104.
    7. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    8. Reinhart, Carmen & Ostry, Jonathan, 1992. "Saving and Terms of Trade Shocks: Evidence from Developing Countries," MPRA Paper 6976, University Library of Munich, Germany.
    9. V V Chari & Patrick J Kehoe & Ellen R. McGrattan, 2003. "Business Cycle Accounting," Levine's Bibliography 506439000000000421, UCLA Department of Economics.
    10. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    11. Andrew Atkeson, 2010. "International lending with moral hazard and risk of repudiation," Levine's Working Paper Archive 200, David K. Levine.
    12. Pablo Andres Neumeyer & Fabrizio Perri, 1999. "Business Cycles in Emerging Economies: the role of interest rates," Department of Economics Working Papers 014, Universidad Torcuato Di Tella.
    13. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
    14. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
    15. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
    16. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
    17. Aaron Tornell & Frank Westermann, 2002. "Boom-Bust Cycles in Middle Income Countries: Facts and Explanation," NBER Working Papers 9219, National Bureau of Economic Research, Inc.
    18. Correia, Isabel & Neves, Joao C & Rebelo, Sérgio, 1994. "Business Cycles in a Small Open Economy," CEPR Discussion Papers 996, C.E.P.R. Discussion Papers.
    19. Ricardo J. Caballero, 2000. "Macroeconomic Volatility in Latin America: A View and Three Case Studies," NBER Working Papers 7782, National Bureau of Economic Research, Inc.
    20. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
    21. GALLEGO Francisco & SCHMIDT-HEBBEL Klaus & SERVÉN Luis, "undated". "General Equilibrium Dynamics of Foreign Shocks and Policy Changes in Chile," EcoMod2003 330700060, EcoMod.
    22. 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.
    23. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:08/20. 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: (Jim Beardow)

    or (Hassan Zaidi)

    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 references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link 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 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.