Business Cycles in Small Open Economies: Evidence From Panel Data Between 1900 and 2013

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. ii Terms of use: Documents in EconStor may AbstractUsing a novel data set for 17 countries dating from 1900 to 2013, we characterize business cycles in both small developed and developing countries in a model with financial frictions and a common shock structure. We estimate the model jointly for these 17 countries using Bayesian methods. We find that financial frictions are an important feature for not only developing countries but also small developed countries. Furthermore, business cycles in both groups of countries are marked with trend productivity shocks. Non-Technical Summary Motivation and QuestionBusiness cycles in emerging economies are marked with highly volatile consumption and countercyclical trade balance. There are two views in the literature to explain these features: Aguiar and Gopinath (2007) argue that business cycles in emerging economies can be well explained by a frictionless real business cycle model with shocks to trend productivity, reflecting frequent regime switches in economic policies and market failures in emerging economies. In contrast, Garcia-Cicco et al. (2010) argue that a model with financial frictions can better capture the dynamics of emerging economies and in that case trend shocks are not necessary. Given these contrasting views, we characterize the important features of business cycles in developing countries and compare with those in advanced countries using long historical data for 17 small open economies. MethodologyWe build a small open economy real business cycle model with reduced-form financial frictions and trend productivity shocks augmented with common shocks. We estimate the model using Bayesian methods jointly for 17 countries between 1900 and 2013. Key ContributionsWe make three contributions to the literature. First, we collect a new data set of macroeconomic variables covering 17 small open economies, for both advanced and developing countries between 1900 and 2013. This is motivated by the fact that most of the previous studies rely on only a few countries' data. Furthermore, while it is important to use long data to identify trend shocks, except for Garcia-Cicco et al. (2010), previous papers use relatively short data due to the limitation of public data, especially for emerging economies. Second, we estimate a model that nests two important features in the literature-trend productivity shocks and financial frictions-to quantify the importance of these two features. Third, we augment the model wi...

Does the Commodity Super Cycle Matter?

“…Finally, the present paper contributes to a literature assessing the role of transitory and permanent shocks in driving business cycles in developed and emerging economies (see, among others, Aguiar and Gopinath, 2007;García-Cicco et al, 2012;Chang and Fernández, 2013;and Miyamoto and Nguyen, 2017). It finds that for both developed and emerging countries transitory shocks play a larger role than permanent shocks even if one conditions on world shocks or on country-specific shocks.…”

The Nonlinear Nature of Country Risk and Its Implications for Dsge Models

“…The estimation yields a relatively high posterior median for ψ = 2.8. Miyamoto and Nguyen (2017) use equally long series and estimate a similar model for 17 developed and developing countries. They use a slightly different functional form, so that a direct comparison of coefficients is not possible.…”

“…In most cases, parameter ψ is calibrated to small values to ensure that the risk premium does not affect model dynamics [e.g., Christoffel et al (2008) use ψ = 0.01]. However, the estimated values of Garcia-Cicco et al (2010) and Miyamoto and Nguyen (2017) are much higher. Two questions emerge.…”

Growth and real business cycles in Vietnam and the Asean-5. Does the trend shock matter?

“…For example, Suzuki (2018a,b) provided evidence that the business cycles of two emerging economies such as Serbia and South Africa are driven by the trend. Miyamoto and Nguyen (2017), employing a sample of seventeen small open economies, found that even if the trend role is not as important as in AG, the average contribution of trend productivity shocks to economic fluctuations is slightly above 30%.…”