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Developing Country Business Cycles: Revisiting the Stylised Facts

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Abstract

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 Agénor 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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  • Rachel Male, 2010. "Developing Country Business Cycles: Revisiting the Stylised Facts," Working Papers 664, Queen Mary University of London, School of Economics and Finance.
  • Handle: RePEc:qmw:qmwecw:wp664
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    1. Rachel Male, 2010. "Developing Country Business Cycles: Characterising the Cycle," Working Papers 663, Queen Mary University of London, School of Economics and Finance.
    2. Pallage, Stephane & Robe, Michel A, 2001. "Foreign Aid and the Business Cycle," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 641-672, November.
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    Cited by:

    1. Rudrani Bhattacharya & Ila Patnaik, 2016. "Financial Inclusion, Productivity Shocks, and Consumption Volatility in Emerging Economies," World Bank Economic Review, World Bank Group, vol. 30(1), pages 171-201.
    2. Jalali Naini, Ahmad Reza & Naderian, Mohammad Amin, 2017. "Oil Price Cycles, Fiscal Dominance and Counter-cyclical Monetary Policy in Iran," MPRA Paper 84480, University Library of Munich, Germany.
    3. Ghate, Chetan & Pandey, Radhika & Patnaik, Ila, 2013. "Has India emerged? Business cycle stylized facts from a transitioning economy," Structural Change and Economic Dynamics, Elsevier, vol. 24(C), pages 157-172.
    4. Bjarni G. Einarsson & Gudjón Emilsson & Svava J. Haraldsdóttir & Thórarinn G. Pétursson & Rósa B. Sveinsdóttir, 2013. "On our own? The Icelandic business cycle in an international context," Economics wp63, Department of Economics, Central bank of Iceland.
    5. Patnaik, Ila & Pundit, Madhavi, 2014. "Is India's Long-Term Trend Growth Declining?," ADB Economics Working Paper Series 424, Asian Development Bank.
    6. Rachel Male, 2010. "Business Cycle Persistence in Developing Countries: How Successful is a DSGE Model with a Vertical Production Chain and Sticky Prices?," Working Papers 672, Queen Mary University of London, School of Economics and Finance.
    7. Ghate, Chetan & Pandey, Radhika & Patnaik, Ila, 2011. "Has India emerged? Business cycle facts from a transitioning economy," Working Papers 11/88, National Institute of Public Finance and Policy.
    8. Carneiro,Francisco Galrao & Hnatkovska,Viktoria, 2016. "Business cycles in the eastern Caribbean economies: the role of fiscal policy and interest rates," Policy Research Working Paper Series 7545, The World Bank.
    9. Ghate, Chetan & Gopalakrishnan, Pawan & Tarafdar, Suchismita, 2016. "Fiscal policy in an emerging market business cycle model," The Journal of Economic Asymmetries, Elsevier, vol. 14(PA), pages 52-77.
    10. Mehdi Bhoury & Mohamed Slim Mouha, 2015. "Characteristics of the Tunisian Business Cycle and its International Synchronization," IHEID Working Papers 16-2015, Economics Section, The Graduate Institute of International Studies.
    11. Ciprian Chirilă & Viorica Chirilă, 2012. "Unemployment And Business Cycles In Central And Eastern European Countries," Anale. Seria Stiinte Economice. Timisoara, Faculty of Economics, Tibiscus University in Timisoara, vol. 0, pages 486-493, November.
    12. Edit V. Velenyi & Marc F. Smitz, 2014. "Cyclical Patterns in Government Health Expenditures Between 1995 and 2010," Health, Nutrition and Population (HNP) Discussion Paper Series 87885, The World Bank.

    More about this item

    Keywords

    Business cycle; Developing economies; Stylised facts; Volatility; Persistence; Cross-correlations;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General

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