Real Business Cycles in Emerging Countries

Abstract

Recently, a number of studies have departed from the mainstream view that in order to explain economic fluctuations in emerging markets, theoretical models must take explicitly into account the role of policy and market failures. This line of research argues that business cycles in emerging countries can be explained well using a neoclassical model featuring no distortions and driven solely by shocks to total factor productivity. Finn Kydland and Carlos Zarazaga (2002), for instance, adopt a strong view by arguing that the RBC model can replicate satisfactorily the “lost decade ” of the 1980s in Argentina. More recently Mark Aguiar and Gita Gopinath (2007) have suggested that an RBC model driven primarily by permanent shocks to productivity can explain well business cycles in developing countries. These authors acknowledge the fact that shocks impinging upon emerging countries are numerous and of different natures but argue that their combined effect can be modeled as an aggregate shock to total factor productivity with a large nonstationary component. In addition, they argue that the neoclassical model is an adequate framework for understanding the transmission of such shocks. In this paper, we undertake an investigation of the hypothesis that an RBC model driven by a combination of permanent and transitory shocks to total factor productivity can account satisfactorily