Emerging Market Business Cycles Revisited: Learning about the Trend

Emine Boz · Christian Daude · Ceyhun Bora Durdu

55 citations0/0 files storedInternational Finance Discussion Paper

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Economic theories and models

Abstract

The data reveal that emerging markets do not differ from developed countries with regards to the variance of permanent TFP shocks relative to transitory. They do differ, however, in the degree of uncertainty agents face when formulating expectations. Based on these observations, we build an equilibrium business cycle model in which the agents cannot perfectly distinguish between the permanent and transitory components of TFP shocks. When formulating expectations, they assign some probability to TFP shocks being permanent even when they are purely transitory. This is sufficient for the model to produce "permanent-like" effects in response to transitory shocks. The imperfect information model calibrated to Mexico predicts a higher variability of consumption relative to output and a strongly negative correlation between the trade balance and output, without the predominance of trend shocks. The same model assuming perfect information and calibrated to Canada accounts for developed country business cycle regularities. The estimated relative variance of trend shocks in these two models is similar.

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References

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2013Financial innovation, the discovery of risk, and the U.S. credit crisis 2011Cyclical wage movements in emerging markets compared to developed economies: The role of interest rates 2013Trend shocks and economic development 2014Have business cycles changed over the last two decades? An empirical investigation 2013Durable goods, financial frictions, and business cycles in emerging economies

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