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International Business Cycles in Emerging Markets

Author

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  • Jacek Rothert

    (United States Naval Academy)

Abstract
This paper documents cyclical behavior of real exchange rates (RERs) in emerging and developed economies: RERs are pro-cyclical in emerging markets and mildly counter-cyclical in developed economies. RER pro-cyclicality coincides with excess volatility of consumption and counter-cyclicality of the trade balance. The paper then re-evaluates the role of trend shocks and interest rate shocks in emerging economies, by incorporating these features into a standard international business cycle model where domestic and foreign goods are imperfect substitutes. In the model, estimated to match the behavior of the RERs, trend shocks play no role in TFP or GDP fluctuations in Mexico. Conversely, exogenous country risk shocks, without any frictions that would create supply-side effects, account for 78% of GDP fluctuations. The key is that domestic and foreign goods are imperfect substitutes, which dampens the impact of trend shocks and accentuates the impact of interest rate shocks on output and consumption.

Suggested Citation

  • Jacek Rothert, 2019. "International Business Cycles in Emerging Markets," Departmental Working Papers 63, United States Naval Academy Department of Economics.
    • Handle: RePEc:usn:usnawp:63
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    References listed on IDEAS

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    4. Krzysztof Beck, 2022. "Macroeconomic policy coordination and the European business cycle: Accounting for model uncertainty and reverse causality," Bulletin of Economic Research, Wiley Blackwell, vol. 74(4), pages 1095-1114, October.
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    6. Horvath, Jaroslav & Yang, Guanyi, 2022. "Unemployment dynamics and informality in small open economies," European Economic Review, Elsevier, vol. 141(C).
    7. Krzysztof Beck, 2021. "Capital mobility and the synchronization of business cycles: Evidence from the European Union," Review of International Economics, Wiley Blackwell, vol. 29(4), pages 1065-1079, September.

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