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Do World Shocks Drive Domestic Business Cycles? Some Evidence from Structural Estimation

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  • Thomas Lubik
  • Wing Teo

Abstract

Existing results on the contribution of terms of trade and world interest rate shocks to output fluctuations in small open economies range from less than 10% to almost 90%. We argue that an identification problems lies at the heart of these vastly di¤erent results. In this paper, we overcome this by estimating a DSGE model using a structural Bayesian estimation approach. We apply our methodology to five developed and developing economies.. Our approach allows us to e?ciently exploit cross-equation restrictions implied by the structural model. We find that world interest rate shocks are the main driving forces of business cycles in small open economies while terms of trade shocks are not.

Suggested Citation

  • Thomas Lubik & Wing Teo, 2005. "Do World Shocks Drive Domestic Business Cycles? Some Evidence from Structural Estimation," Economics Working Paper Archive 522, The Johns Hopkins University,Department of Economics.
  • Handle: RePEc:jhu:papers:522
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    Cited by:

    1. Daniel Buncic & Martin Melecky, 2008. "An Estimated New Keynesian Policy Model for Australia," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 1-16, March.
    2. Paul Castillo Bardález & Jorge Salas, 2010. "Los términos de intercambio como impulsores de fluctuaciones económicas en economías en desarrollo: estudio empírico," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2010, enero-jun.
    3. Bhattacharya, Rudrani & Patnaik, Ila & Pundit, Madhavi, 2013. "Emerging economy business cycles: Financial integration and terms of trade shocks," Working Papers 13/120, National Institute of Public Finance and Policy.
    4. Hangyu Lee, 2014. "International Interest Rate Shocks and Monetary Policy in a Small Open Economy," Korean Economic Review, Korean Economic Association, vol. 30, pages 217-246.
    5. Arturo Antón Sarabia, 2008. "Accounting for Output Fluctuations in Mexico," Working Papers 2008-05, Banco de México.
    6. Juan Pablo Medina & Claudio Soto, 2007. "The Chilean Business Cycles Through the Lens of a Stochastic General Equilibrium Model," Working Papers Central Bank of Chile 457, Central Bank of Chile.
    7. Alejandro Justiniano & Bruce Preston, 2010. "Monetary policy and uncertainty in an empirical small open-economy model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 93-128.
    8. Thomas Lubik, 2006. "A simple, structural, and empirical model of the antipodean transmission mechanism," New Zealand Economic Papers, Taylor & Francis Journals, vol. 40(2), pages 91-126.
    9. Tomura, Hajime, 2010. "International capital flows and expectation-driven boom-bust cycles in the housing market," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1993-2009, October.
    10. Paul Castillo Bardález & Jorge Salas, 2010. "The Terms of Trade as Drivers of Economic Fluctuations in Developing Economies: An Empirical Study," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2010eng, enero-jun.
    11. Kerli Lille, 2017. "The Role Of Capital Controls In Mediating Global Shocks," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 102, Faculty of Economics and Business Administration, University of Tartu (Estonia).
    12. Hajime Tomura, 2008. "A Model of Housing Boom and Bust in a Small Open Economy," Staff Working Papers 08-9, Bank of Canada.
    13. Arturo Antón Sarabia, 2007. "The Financial Accelerator from a Business Cycle Accounting Perspective," Working Papers 2007-06, Banco de México.
    14. Ng, Eric C.Y. & Feng, Ning, 2016. "Housing market dynamics in a small open economy: Do external and news shocks matter?," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 64-88.

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