Business cycles in emerging economies: the role of interest rates |
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Authors: | Pablo A Neumeyer Fabrizio Perri |
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Institution: | a Universidad T. di Tella, Miñones 2177, C1428ATG, Buenos Aires, Argentina b CONICET, Avda, Rivadevia 1917, CP C1033AAJ, Buenos Aires, Argentina c Department of Economics, Stern School of Business, New York University, 44 West 4th Street, New York, NY 10002, USA d Federal Reserve Bank of Minneapolis, 90 Hennepin Avenue, Minneapolis, MN 55480, USA e NBER, 1050 Massachusetts Avenue, Cambridge, MA 02138, USA f CEPR, 90-98 Goswell Road, London EC1V 7RR, UK |
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Abstract: | We find that in a sample of emerging economies business cycles are more volatile than in developed ones, real interest rates are countercyclical and lead the cycle, consumption is more volatile than output and net exports are strongly countercyclical. We present a model of a small open economy, where the real interest rate is decomposed in an international rate and a country risk component. Country risk is affected by fundamental shocks but, through the presence of working capital, also amplifies the effects of those shocks. The model generates business cycles consistent with Argentine data. Eliminating country risk lowers Argentine output volatility by 27% while stabilizing international rates lowers it by less than 3%. |
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Keywords: | E32 F32 F41 |
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