Explaining business cycles in small open economies: ‘How much do world prices matter?’ |
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Authors: | M.Ayhan Kose |
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Affiliation: | Graduate School of International Economics and Finance, MS-021, Brandeis University, Waltham, MA 02454, USA |
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Abstract: | This paper analyzes the role of world price shocks - fluctuations in the prices of capital, intermediate, and primary goods, and in the world real interest rate - in the generation and propagation of business cycles in small open developing countries. I construct a stochastic dynamic multi-sector small open economy model. The model is a variant of the specific-factors model and reflects the major structural characteristics of developing economies. I utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks. The results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries. |
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Keywords: | Business cycles Relative prices |
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