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Developing Country Business Cycles: Revisiting the Stylised Facts

Identifying business cycle stylised facts is essential as these often form the basis for the construction and validation of theoretical business cycle models. Furthermore, understanding the cyclical patterns in economic activity, and their causes, is important to the decisions of both policymakers and market participants. Previous analyses of developing country stylised facts have tended to feature only small samples, for example the seminal paper by Ag�nor et al. (2000) considers just twelve middle-income economies. Consequently, unlike for the industrialised countries, there is not a consistent set of developing country business cycle stylised facts. Motivated by importance of these business cycle statistics, this paper makes an important contribution to the literature by extending and generalising the developing country stylised facts for a sample of thirty-two developing countries. In particular, it is found that real interest rates are, on average, weakly procyclical in developing countries, not countercyclical as previously reported; this holds only for the Latin American economies. There is evidence that money leads the cycle in numerous developing economies, and thus that monetary shocks are an important source of business cycle fluctuations. However domestic credit, which is thought to fulfil an important role in determining investment, and hence economic activity, in developing economies, is found to lag, rather than lead, the cycle, thus implying that fluctuations in output influence credit rather than credit influencing the business cycle. A final key empirical finding is that developing country business cycles are characterised by significantly persistent output fluctuations; however, the magnitude of this persistence is somewhat lower than for the developed countries. Furthermore, prices and nominal wages are found to be significantly persistent in almost all of the developing countries. This finding is particularly important, because it justifies the use of theoretical models with staggered prices and wages for the modelling of developing country business cycles.

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Paper provided by Queen Mary University of London, School of Economics and Finance in its series Working Papers with number 664.

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Date of creation: May 2010
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Handle: RePEc:qmw:qmwecw:wp664
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  1. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
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  8. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 223, Federal Reserve Bank of Minneapolis.
  9. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
  10. David K. Backus & Patrick J. Kehoe, 1991. "International evidence on the historical properties of business cycles," Staff Report 145, Federal Reserve Bank of Minneapolis.
  11. Arellano, Cristina, 2008. "Default risk and income fluctuations in emerging economies," MPRA Paper 7867, University Library of Munich, Germany.
  12. Rachel Male, 2010. "Developing Country Business Cycles: Characterising the Cycle," Working Papers 663, Queen Mary University of London, School of Economics and Finance.
  13. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-52, September.
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