Working Paper: NBER ID: w12629
Authors: Javier Garcacicco; Roberto Pancrazi; MartÃn Uribe
Abstract: We use more than one 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 at 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.
Keywords: Real Business Cycles; Emerging Markets; Financial Frictions; Productivity Shocks
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| RBC model driven by permanent and transitory productivity shocks (O49) | fails to explain business cycles in Argentina and Mexico (N16) |
| RBC model (R15) | fails to match the autocorrelation function of the trade balance to output ratio (E19) |
| empirical data (C81) | shows trade balance to output ratio converges quickly to zero (F62) |
| consumption growth is significantly more volatile than output growth (E20) | contradicts RBC model predictions (C59) |
| augmented model incorporating financial frictions and country premium shocks (E19) | provides a remarkably good account of business cycles (E32) |
| financial frictions (G19) | important in understanding the dynamics of business cycles in emerging markets (F44) |
| estimated model (C51) | successfully replicates key features of the data (C59) |
| observed excess volatility of consumption (E21) | indicates traditional productivity shocks do not drive fluctuations (E39) |