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Macroeconomic Fluctuations in Emerging Economies: An Unobserved Components Approach

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We employ a multivariate correlated unobserved components model to investigate the interaction between the permanent and transitory movements in output for two groups of emerging economies: one group in Asia and the other in Latin America. Our empirical framework enables us to assess the relative importance of permanent versus transitory shocks in driving output growth rate correlations across countries, providing an alternative to dynamic factor models for analyzing international co-movements. Our results suggest that GDP in all the emerging economies have highly variable stochastic permanent components with innovations that are negatively correlated with their respective transitory movements. We also find that the Asian countries in our sample share a significant fraction of innovations to output whereas output disturbances are largely idiosyncratic for the Latin American countries. These results lead us to conclude that Asia may be a plausible candidate for a monetary union, whereas Latin American countries do not seem similar enough in terms of macroeconomic fluctuations to gain from sharing a common currency.

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  • Sinchan Mitra & Tara M. Sinclair, "undated". "Macroeconomic Fluctuations in Emerging Economies: An Unobserved Components Approach," MRG Discussion Paper Series 3911, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uqmrg6:39
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    File URL: http://www.uq.edu.au/economics/mrg/3911.pdf
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    1. Calderon, Cesar & Fuentes, Rodrigo, 2010. "Characterizing the business cycles of emerging economies," Policy Research Working Paper Series 5343, The World Bank.
    2. Sunghyun Henry Kim & M. Ayhan Kose & Michael G. Plummer, 2003. "Dynamics of Business Cycles in Asia: Differences and Similarities," Review of Development Economics, Wiley Blackwell, vol. 7(3), pages 462-477, August.
    3. Gregory, Allan W & Head, Allen C & Raynauld, Jacques, 1997. "Measuring World Business Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 677-701, August.
    4. Harding, Don & Pagan, Adrian, 2002. "Dissecting the cycle: a methodological investigation," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 365-381, March.
    5. Ronald McKinnon & Gunther Schnabl, 2002. "Synchronized Business Cycles in East Asia: Fluctuations in the Yen/Dollar Exchange Rate and China’s Stabilizing Role," Working Papers 02010, Stanford University, Department of Economics.
    6. Claudio H. dos Santos & Anwar Shaikh & Gennaro Zezza, 2003. "Measures of the Real GDP of US Trading Partners: Methodology and Results," Economics Working Paper Archive wp_387, Levy Economics Institute.
    7. Willy W. Hoffmaister & Jorge Roldos, 1997. "Are Business Cycles Different in Asia and Latin America?," IMF Working Papers 97/9, International Monetary Fund.
    8. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, World Bank Group, vol. 14(2), pages 251-285, May.
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