Real Business Cycles in Emerging Countries?

TLDR

The study estimates a small‑open‑economy RBC model using over a century of Argentine and Mexican data, first with nonstationary productivity shocks and then augmenting it with country‑premium and financial‑friction shocks. The baseline RBC model poorly explains business cycles in emerging markets, whereas the augmented financial‑friction model fits well and shows nonstationary productivity shocks play a negligible role. JEL codes: E13, E32, E44, F43, O11, O16.

Abstract

We use more than a century of Argentine and Mexican data to estimate the structural parameters of a small-open-economy real-business-cycle model driven by nonstationary productivity shocks. We find that the RBC model does a poor job of explaining business cycles in emerging countries. We then estimate an augmented model that incorporates shocks to the country premium and financial frictions. We find that the estimated financial-friction model provides a remarkably good account of business cycles in emerging markets and, importantly, assigns a negligible role to nonstationary productivity shocks. (JEL E13, E32, E44, F43, O11, O16)