Emerging Market Business Cycles: The Cycle Is the Trend

Abstract

Emerging market business cycles exhibit strongly countercyclical current accounts, consumption volatility that exceeds income volatility, and "sudden stops" in capital inflows. These features contrast with developed small open economies. Nevertheless, we show that a standard model characterizes both types of markets. Motivated by the frequent policy regime switches observed in emerging markets, our premise is that these economies are subject to substantial volatility in trend growth. Our methodology exploits the information in consumption and net exports to identify the persistence of productivity. We find that shocks to trend growth-rather than transitory fluctuations around a stable trend-are the primary source of fluctuations in emerging markets. The key features of emerging market business cycles are then shown to be consistent with this underlying income process in an otherwise standard equilibrium model.

Technology Shocks and Business Cycles in India

“…Some recent papers, such as Aguiar and Gopinath (2007) and Garcia-Cicco et al (2010) study the role of transitory and permanent technology shocks for business cycles in emerging countries. However, none of these papers address the role of IST shocks in driving emerging market business cycles.…”

An Estimated DSGE Model of the Indian Economy

“…In fact, some stylized facts may be pointed out: i) output growth tends to be subject to larger swings in developing countries; ii) private consumption, relative to income, is substantially more volatile; iii) terms of trade and output are strongly positively correlated, while real interest rates and output/net exports display large countercyclicality relative to developed economies; iv) capital inflows are subject to dramatic "sudden stops" (see Agenor et al (2000), Aguiar and Gopinath (2007) and Neumeyer and Perri (2005), for example).…”

Crises in Asia: Historical perspectives and implications

“…This pattern is consistent with previous findings on business cycles of developing economies. Mendoza (1995), Agenor, McDermott, and Prasad (1999), Neumeyer and Perry (2005), Aguiar and Gopinath (2007) commonly find that GDP volatility is greater in developing economies than in developed ones. One difference is that these studies consider not only recessions but also expansions.…”