On the Sources of Aggregate Fluctuations in Emerging Economies

Abstract

Recent research on macroeconomic fluctuations in emerging economies has focused in two leading approaches: introducing a stochastic productivity trend, in addition to temporary productivity shocks; or allowing for foreign interest rate shocks coupled with financial frictions. This paper compares the two approaches empirically, and also evaluates a model that encompasses them, taking advantage of recent developments in the theory and implementation of Bayesian methods. The encompassing model assigns a significant role to interest rate shocks and financial frictions, but not to trend shocks, in generating and amplifying aggregate fluctuations. Formal model comparison exercises favor models with financial frictions over the stochastic trend model, although this is sensitive to the inclusion of measurement errors. Of the two financial frictions we consider, working capital versus spreads linked to expected future productivity, the latter emerges as key for a reasonable approximation to the data.

Policy risk and the business cycle

“…Our estimation results hint at a utility function featuring a low wealth effect on the labor supply. This is in line with an increasing number of studies from the fiscal policy (Monacelli and Perotti, 2008), open economy (Chang and Fernández, 2010;Garcia-Cicco et al, 2010), and news literature (Jaimovich and Rebelo, 2009;Schmitt-Grohé and Uribe, 2008), which also suggest the presence of a low wealth effect on the labor supply. …”

Simple Models to Understand and Teach Business Cycle Macroeconomics for Emerging Market and Developing Economies

“…One reason is that we can easily account for countercyclical interest rates and the higher volatility of the real wage. Another important reason to prefer the NP model is that, according to Chang and Fernández (2010), its original version shows a better data t than does the original AG model. Indirect support is also given by Hevia (2014).…”

ClubMed? Cyclical fluctuations in the Mediterranean basin

“…For example, Kydland and Zarazaga (2002), Aguiar and Gopinath (2008), among others, have argued that business cycles in developed and developing countries are alike and that di¤erences in the productivity process are su¢ cient to account for existing cyclical di¤erences. Chang and Fernandez (2010), Benczur and Raftai (2010), and Garcia-Cicco et al (2011), instead suggest that heterogeneities are pervasive and that cyclical di¤erences in the two groups of countries have to do more with the structure of the economies than with the productivity process.…”