Working Paper: CEPR ID: DP4482
Authors: Pablo Andrés Neumeyer; Fabrizio Perri
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%.
Keywords: country risk; financial crises; international business cycles; sudden stops; working capital
JEL Codes: E32; F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| real interest rates (E43) | output volatility (E23) |
| business cycles (E32) | output volatility (E23) |
| real interest rates (E43) | consumption volatility (E20) |
| real interest rates (E43) | net exports (F29) |
| country risk (F34) | output volatility (E23) |
| international rates stabilization (F33) | output volatility (E23) |
| domestic productivity shocks (O49) | country risk (F34) |
| domestic productivity shocks (O49) | real interest rates (E43) |
| real interest rates (E43) | business cycles (E32) |