Working Paper: CEPR ID: DP8574
Authors: Diego Comin; Norman Loayza; Farooq Pasha; Luis Servn
Abstract: Business cycle fluctuations in developed economies (N) tend to have large and persistent effects on developing countries (S). We study the transmission of business cycle fluctuations for developed to developing economies with a two-country asymmetric DSGE model with two features: (i) endogenous and slow diffusion of technologies from the developed to the developing country, and (ii) adjustment costs to investment flows. Consistent with the model we observe that the flow of technologies from N to S co-moves positively with output in both N and S. After calibrating the model to Mexico and the U.S., it can explain the following stylized facts: (i) U.S. and Mexican output co-move more than consumption; (ii) U.S. shocks have a larger effect on Mexico than in the U.S.; (iii) U.S. business cycles lead over medium term fluctuations in Mexico; (iv) Mexican consumption is more volatile than output.
Keywords: business cycles in developing countries; comovement between developed and developing economies; extensive margin of trade; FDI; product life cycle; volatility
JEL Codes: E3; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| North recession (R19) | South investment contraction (E22) |
| North recession (R19) | South output collapse (R15) |
| US shocks (F69) | Mexican output (C67) |
| North technology diffusion (O33) | South output (R15) |
| US output (F29) | Mexican output (C67) |