International Business Cycles in Emerging Markets

Abstract

I document cyclical behavior of real exchange rates (RERs) in emerging and developed economies: stronger RER procyclicality coincides with larger relative volatility of consumption and more countercyclical trade balance. I then reevaluate the sources of fluctuations in emerging economies using an international business cycle model estimated to match the behavior of the RERs. Interest rate shocks, without any frictions, account for most of output fluctuations. This result is driven by imperfect substitution between domestic and foreign goods, which dampens the impact of trend shocks and accentuates the impact of interest rate shocks on output and consumption.

Capital mobility and the synchronization of business cycles: Evidence from the European Union

“…International business cycle models are stressing negative impact of financial integration on output correlations (Ambler et al., 2004; Backus et al., 1992; Ravn, 1997; Rothert, 2020; Shaghali et al., 1993), and empirical research is showing that this relationship hold in the short run (Beck, 2019; Cerqueira & Martins, 2009; Kalemli‐Ozcan et al., 2013; Monnet & Puy, 2016). However, he tighter integration of European capital markets provides a basis for the high correlation of business cycles.…”

“…Theoretically, the impact of capital mobility and financial integration on the behavior of business cycles is ambiguous. On the one hand, international real business cycle models demonstrate that, with no impediments to capital mobility, the capital flows to countries with the highest return rate contribute to lower business cycle correlations (Ambler et al., 2004; Backus et al., 1992; Ravn, 1997; Rothert, 2020; Shaghali et al., 1993). Similar conclusions can be drawn based on the models stressing banking integration (Morgan et al., 2004).…”

Financial development and economic growth in a microfounded small open economy model

“…Moreover, 𝜖 𝑡 𝑋 is the exogenous preference shock with respect to domestic output in the world market (𝜖 𝑡 𝑋 > 0 means the exported domestic output is more desirable). It is a common modeling choice to include a preference shock as such in the literature of international business cycles to match the persistence observed in the data (Kollmann, 2016;Rothert, 2020). 𝐶 𝑡 * is the exogenous world consumption per capita, which is the counterpart of 𝐶 𝑡 .…”

Redistributive fiscal policies and business cycles in emerging economies

“…Our consideration of observed fiscal policy offers another perspective on the origins of business cycle behavior of emerging economies. In the attempt to account for excess volatility of consumption and strongly counter-cyclical trade balance, previous literature explored the role of potentially different productivity process (introduced by Aguiar and Gopinath (2007) and further evaluated by Chen and Crucini (2016), Garcia-Cicco et al (2010), Chang andFernández (2013), and Rothert and Rahmati (2014)), counter-cyclical interest rates (Neumeyer and Perri (2005), Yue (2006), Fernández andGulan (2015)), or different substitutability between domestic and foreign goods (Rothert (2016)). In this paper we show that difference in the size and cyclicality of social benefits goes a long way in accounting for both highly volatile consumption and counter-cyclical trade balance.…”