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International Business Cycles in Emerging Markets

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  • Jacek Rothert

    (United States Naval Academy)

Abstract

This paper documents cyclical behavior of real exchange rates (RERs) in emerging and developed economies: RERs are pro-cyclical in emerging markets and mildly counter-cyclical in developed economies. RER pro-cyclicality coincides with excess volatility of consumption and counter-cyclicality of the trade balance. The paper then re-evaluates the role of trend shocks and interest rate shocks in emerging economies, by incorporating these features into a standard international business cycle model where domestic and foreign goods are imperfect substitutes. In the model, estimated to match the behavior of the RERs, trend shocks play no role in TFP or GDP fluctuations in Mexico. Conversely, exogenous country risk shocks, without any frictions that would create supply-side effects, account for 78% of GDP fluctuations. The key is that domestic and foreign goods are imperfect substitutes, which dampens the impact of trend shocks and accentuates the impact of interest rate shocks on output and consumption.

Suggested Citation

  • Jacek Rothert, 2019. "International Business Cycles in Emerging Markets," Departmental Working Papers 63, United States Naval Academy Department of Economics.
    • Handle: RePEc:usn:usnawp:63
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    Cited by:

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    2. Miescu, Mirela S., 2023. "Uncertainty shocks in emerging economies: A global to local approach for identification," European Economic Review, Elsevier, vol. 154(C).
    3. Germaschewski, Yin & Horvath, Jaroslav & Rubini, Loris, 2024. "How important are trend shocks? The role of the debt elasticity of interest rate," Journal of International Economics, Elsevier, vol. 152(C).
    4. Alovokpinhou, Sedjro Aaron & Malikane, Christopher, 2024. "The effect of output and the real exchange rate on equity price dynamics," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    5. David Aboagye Danquah & Emmanuel Mensah & Charles Barnor, 2025. "Optimizing foreign direct investment for sustainable trade balance improvement: the case of a developing economy," SN Business & Economics, Springer, vol. 5(3), pages 1-26, March.
    6. Dan Cao & Jean-Paul L’Huillier & Donghoon Yoo, 2022. "When Is the Trend the Cycle?," ISER Discussion Paper 1177, Institute of Social and Economic Research, The University of Osaka.
    7. Zhang, Bo & Zhou, Peng, 2021. "Financial development and economic growth in a microfounded small open economy model," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    8. Krzysztof Beck, 2022. "Macroeconomic policy coordination and the European business cycle: Accounting for model uncertainty and reverse causality," Bulletin of Economic Research, Wiley Blackwell, vol. 74(4), pages 1095-1114, October.
    9. Jaroslav Horvath & Guanyi Yang, 2024. "Global Financial Risk, Equity Returns and Economic Activity in Emerging Countries," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 86(3), pages 672-689, June.
    10. Froemel, Maren & Paczos, Wojtek, 2024. "Imperfect financial markets and the cyclicality of social spending," European Economic Review, Elsevier, vol. 167(C).
    11. Sámano Daniel, 2022. "Foreign Currency Working Capital Constraints for Imported Inputs and Compositional Effects in Intermediate Goods," Working Papers 2022-20, Banco de México.
    12. Horvath, Jaroslav & Yang, Guanyi, 2022. "Unemployment dynamics and informality in small open economies," European Economic Review, Elsevier, vol. 141(C).
    13. Krzysztof Beck, 2021. "Capital mobility and the synchronization of business cycles: Evidence from the European Union," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 1065-1079, September.

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