Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions

Andrés Fernández · Adam Gulan

104 citations0/0 files storedAmerican Economic Journal Macroeconomics

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

Abstract

Countercyclical country interest rates have been shown to be an important characteristic of business cycles in emerging markets. In this paper we provide a microfounded rationale for this pattern by linking interest rate spreads to the dynamics of corporate leverage. For this purpose we embed a financial accelerator into a business cycle model of a small open economy and estimate it on a novel panel dataset for emerging economies that merges macroeconomic and financial data. The model accounts well for the empirically observed countercyclicality of interest rates and leverage, as well as for other stylized facts. (JEL E13, E32, E43, E44, F41, O11)

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References

2019American Economic Review 1998Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data 1995What Do We Know about Capital Structure? Some Evidence from International Data 1998The Financial Accelerator in a Quantitative Business Cycle Framework 1995What Do We Know about Capital Structure? Some Evidence from International Data 2002Closing Small Open Economy Models 2000Tunneling 1986Investment, Capacity Utilization and the Real Business Cycle

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