Accounting for Business Cycles in Emerging Market Economies Public Deposited

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  • March 19, 2019
  • Silva, Marcelo Eduardo Alves da
    • Affiliation: College of Arts and Sciences, Department of Economics
  • The main goal of this study is to address the fundamental question: what drives business cycle fluctuations in emerging economies? The analysis of the literature does not deliver a clear and straight answer to this question. The results are mixed because different authors implement different methodologies, use different data set and countries, and mainly because they consider different number and type of shocks to explain aggregate fluctuations. In this study we focus on the later aspect. Our basic strategy consists in implementing an integrated analysis that incorporates shocks that have been identified in the recent literature as important driving forces into the same theoretical framework. We develop a small open economy model augmented to include temporary and permanent productivity shocks, shocks to the terms of trade, to the world real interest rate, to the risk premium and to government expenditures. We implement a variance decomposition exercise to assess the role played by these shocks in driving business cycle fluctuations in our benchmark emerging market economy. We implement a Bayesian likelihood estimation of the structural parameters of the model using Brazilian data over the period from the third quarter of 1994 to the first quarter of 2008. The main findings are: (1) output is mostly driven by temporary productivity shocks, while shocks to the growth rate of trend productivity (growth shocks) are less important; (2) terms of trade shocks explain about 13% of output growth volatility; (3) world real interest rate shocks and government expenditure shocks appear to be unimportant in driving the business cycles; (4) 10% of aggregate output fluctuations are explained by risk premium shocks.
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  • In Copyright
  • Salemi, Michael K.
  • Open access

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