Business Cycles in Emerging Economies: The Role of Interest Rates

Abstract

Werning, and participants at several seminars and conferences for helpful suggestions. We are also grateful for the financial support of the Tinker Foundation and the Agencia de Promoción Científica y Tecnológica (Pict 98 Nro. 02-03543) and to the department of economics at the Stern School of Business for hosting Neumeyer in the Spring of 1999. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System The views expressed herein are those of the author and not necessarily those of the National Bureau of Economic Research.

Feldstein–Horioka puzzles

“…In our model, co-movement is driven precisely by this feature. This approach is consistent with the arguments of Neumeyer and Perri (2005) and Aguiar and Gopinath (2007b) that to explain emerging market economic dynamics, interest rates should be correlated with productivity shocks.…”

“…For instance, Neumeyer and Perri (2005) and Aguiar and Gopinath (2007b) model country risk premia as functions of national technology shocks. While Aguiar and Gopinath (2007b) find that this does not significantly affect the main predictions of their model, Neumeyer and Perri (2005) emphasize the importance of country risk premia for emerging markets. It would be of interest to examine the role of country risk premia for the FH puzzles and for our explanation of them.…”

“…In Neumeyer and Perri (2005) the global interest rate is an AR(1) process estimated from U.S. interest rate data with shocks assumed to be independent of national shocks (in Aguiar and Gopinath (2007a, b) the world interest rate is constant). In principle, one could extend their specification to allow for correlations between world interest rate shocks and national technology shocks.…”

“…We set β ¼ 0:993, which results in a world steady-state return on capital of 8 percent (annualized). The steady-state debt-output ratio ι is set at 0.1 for an advanced SOE (following Aguiar and Gopinath, 2007a) and 0.42 for an emerging SOE, which is the value used in Neumeyer and Perri (2005).…”

“…First, we build on recent work (e.g. Aguiar and Gopinath, 2007a, b;Neumeyer and Perri, 2005) that emphasize very different shock processes and associated macroeconomic dynamics in emerging small open economies from those in advanced small open economies. Our belief is that these differences might reasonably be expected to matter for saving-investment correlations.…”