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## Emerging Market Business Cycles: The Cycle Is the Trend (2007)

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Venue: | Journal of Political Economy |

Citations: | 195 - 2 self |

### Citations

3866 |
Time Series Analysis
- Hamilton
- 1994
(Show Context)
Citation Context ... difficulty of detecting a unit root in a finite time series, much less accurately measuring its relative contribution to overall variance, is the subject of a large literature (see the discussion in =-=Hamilton 1994-=-, Ch 15). In particular, σ 2 ∆τ σ2∆sr represents the normalized spectrum at frequency zero and therefore can be represented by (1 + 2 ∑∞ k=1 ρ(∆srt,∆srt−j)), where ρ(x, y) denotes the correlation betw... |

2592 | Large Sample Properties of Generalized Methods of Moments Estimators - Hansen - 1982 |

909 |
Uninsured idiosyncratic risk and aggregate saving
- Aiyagari
- 1994
(Show Context)
Citation Context ...y approximating a non-linear economy for which a stationary distribution exists (for example, due to borrowing constraints and a world equilibrium interest that is lower than the discount rate, as in =-=Aiyagari 1994-=-). Quantitatively, since the elasticity of interest rate to changes in indebtedness is set close to 0 (0.001 to be exact), there is a negligible difference between the two approaches in terms of the H... |

583 |
A New Approach to Decomposition of Economic Time Series into Permanent and Transitory Components with Particular Attention to Measurement of the Business Cycle,”
- Beveridge, Nelson
- 1981
(Show Context)
Citation Context ...e show that such an emerging market business cycles 83 approach, with the short time series of available data, is inconclusive. We find estimates consistent with the permanent component in Mexico being larger than in Canada. However, the results are sensitive to assumptions about lag length, and the standard errors of the estimates are large. This motivates the methodology we present in the next subsection. To set notation, recall that the log of the Solow residual in the model is . We can rewrite as the sum of a random walk com-sr p z a ln G srt t t t ponent tt and a transitory component . Beveridge and Nelson (1981)st show that such a decomposition always exists for an I(1) process: sr p t s , (9)t t t where a gt p am t e (10)t g t1 t( )1 rg is a random walk (with drift) and args p z (g m ) (11)t t t g( )1 rg is a stationary series. The relative magnitudes of jg and jz (as well as the respective autocorrelations) capture the importance of trend versus transitory shocks. A natural measure of the importance of trend shocks is the variance of Dt relative to the overall variance of Dsr : 2 2 2j a jgDt p . (12)2 2 2j (1 r ) jDsr g Dsr This is the conceptual measure advocated in Cochrane (1988... |

539 |
Closing Small Open Economy Models”,
- Schmitt-Grohe, Uribe
- 2003
(Show Context)
Citation Context ... is 13 . The parameter for risk aversion is set at 2, and the depreciation rate at 0.05. The coefficient on the interest-rate-premium term is set at 0.001, which is the number used in the literature (=-=Schmitt-Grohe and Uribe 2003-=-, Neumeyer and Perri 2002). The steady-state level of debt-to-GDP is set at 0.1 for both specifications. The results are insensitive to alternate levels of steady-state debt-to-GDP. The capital adjust... |

364 | Business cycles in emerging economies: the role of interest
- Neumeyer, Perri
- 2005
(Show Context)
Citation Context ... aversion is set at two and the depreciation rate at 0.05. The coefficient on the interest rate premium term is set at 0.001, which is the number used in the literature (Schmitt-Grohe and Uribe 2003; =-=Neumeyer and Perri 2005-=-). The steady-state level of debt to GDP is set at 0.1 for both specifications. The results are insensitive to alternate levels of steady-state debt to GDP. The capital adjustment cost parameter f is ... |

272 | How big is the random walk in GNP? - Cochrane - 1988 |

208 | Consumption Inequality and Income Uncertainty", Quarterly - Blundell, Preston - 1998 |

182 |
Climate Change
- Watson, Zinyowera, et al.
- 1996
(Show Context)
Citation Context ... subject to substantial volatility in trend growth. Our methodology exploits the information in consumption and net exports to identify the persistence of productivity. We find that shocks to trend growth—rather than transitory fluctuations around a stable trend—are the primary source of fluctuations in emerging markets. The key features of emerging market business cycles are then shown to be consistent with this underlying income process in an otherwise standard equilibrium model. I. Introduction While business cycle fluctuations in developed markets may have moderated in recent decades (see Stock and Watson 2003), business cycles We thank Seung Jung Lee for excellent research assistance. We thank Andy Atkeson, V. V. Chari, Steve Davis, Pierre-Olivier Gourinchas, Anil Kashyap, Patrick Kehoe, Ayhan Kose, and Fabrizio Perri for comments. We also thank workshop participants at a number of venues. We thank the Chicago Graduate School of Business for research support, and Gopinath thanks as well the James S. Kemper Foundation. 70 journal of political economy in emerging markets are characterized increasingly by their large volatility and dramatic current-account reversals, the so-called “sudden stop” phenom... |

179 |
Real Business Cycles in a Small Open
- Mendoza
- 1991
(Show Context)
Citation Context ...ss cycle literature showed early on that following a positive transitory shock to productivity, the trade balance can deteriorate even as savings rise because of the response of increased investment (=-=Mendoza 1991-=-; Backus, Kehoe, and Kydland 1995). Following the preceding discussion, the higher the persistence of the shock, the larger the trade balance deterioration. However, in the data, (Hodrick-Prescott-fil... |

167 | Real business cycles in a small-open economy,”
- Mendoza
- 1991
(Show Context)
Citation Context ...al RBC literature showed early on that following a positive transitory shock to productivity, the trade balance 4 can deteriorate even as savings rise because of the response of increased investment (=-=Mendoza 1991-=-, Backus, Kehoe, and Kydland, 1995). Following the preceding discussion, the higher the persistence of the shock the larger the trade balance deterioration. However, in the data, (HP-filtered) log GDP... |

137 | International business cycles: theory and evidence, - Backus, Kehoe, et al. - 1995 |

115 | When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options’,
- Calvo, Reinhart
- 1999
(Show Context)
Citation Context ... residual. Nevertheless, the estimated model does quite well in matching the autocovariance function of the empirical Solow residuals. Similar patterns emerge using the model estimates from the other columns of table 4 (not depicted). In short, the behavior of consumption and net exports over the business cycle implies productivity parameters that are borne out in the data. D. Sudden Stops A major challenge to models of emerging markets is explaining the large current-account reversals observed in the data, the so-called sudden stops. The sudden-stop phenomenon has been described in detail in Calvo and Reinhart (2000), Arellano and Mendoza (2002), and Gopinath (2004), among others. It is specifically associated with an abrupt and large reversal in net capital inflows and the current account. An example of the sudden-stop phenomenon is the Mexican Tequila crisis, when there was a 9.6-percentage-point reversal in the ratio of the trade balance to GDP, from a deficit of 3.8 percent to a surplus of 5.7 percent, between the third quarter of 1994 and the second quarter of 1995. Over 11 Our empirical series on Solow residuals is unavoidably noisy because of the limited availability of data for capacity utilizatio... |

96 |
Temporary Stabilization: Predetermined Exchange Rates”
- Calvo
- 1986
(Show Context)
Citation Context ...We have performed the core analysis using data from other small open economies. We find that our respective benchmark economies are indeed representative of emerging and developed economies. Specifically, the relative importance of the random walk component is larger for emerging markets than it is for developed economies. The average random walk component is 0.84 for emerging markets and 0.61 for developed countries. One striking feature of emerging-market economies is the volatility of interest rates, a feature omitted from the analysis. The role of intertemporal substitution is stressed by Calvo (1986) in explaining consumption booms following noncredible inflation stabilizations. A recent paper by Neumeyer and Perri (2005) addresses business cycles in emerging markets by emphasizing exogenous movements in interest rates and preferences. In our benchmark estimation, movements in consumption are driven by income shocks, with the interest rate remaining essentially fixed given the small value of w. This raises the concern that we have forced the income process in our benchmark model to explain consumption or investment fluctuations that in reality were due to movements in the interest rate. T... |

83 | Credit frictions and Sudden Stops in small open economies: an equilibrium business cycle framework for emerging market crises,”
- Arellano, Mendoza
- 2003
(Show Context)
Citation Context ...e estimated model does quite well in matching the autocovariance function of the empirical Solow residuals. Similar patterns emerge using the model estimates from the other columns of table 4 (not depicted). In short, the behavior of consumption and net exports over the business cycle implies productivity parameters that are borne out in the data. D. Sudden Stops A major challenge to models of emerging markets is explaining the large current-account reversals observed in the data, the so-called sudden stops. The sudden-stop phenomenon has been described in detail in Calvo and Reinhart (2000), Arellano and Mendoza (2002), and Gopinath (2004), among others. It is specifically associated with an abrupt and large reversal in net capital inflows and the current account. An example of the sudden-stop phenomenon is the Mexican Tequila crisis, when there was a 9.6-percentage-point reversal in the ratio of the trade balance to GDP, from a deficit of 3.8 percent to a surplus of 5.7 percent, between the third quarter of 1994 and the second quarter of 1995. Over 11 Our empirical series on Solow residuals is unavoidably noisy because of the limited availability of data for capacity utilization, materials used, a reliable... |

59 |
Why is Consumption so Smooth?. Review of Economic Studies
- Campbell, Deaton
- 1989
(Show Context)
Citation Context ...ion at business-cycle frequencies even controlling for the already high income volatility. There is a large literature on the excessive “smoothness” of consumption in the U.S. data (see, for example, =-=Campbell and Deaton 1989-=-). Of course, whether consumption is excessively smooth in developed economies or excessively volatile in emerging markets depends on the underlying process for income. Once we parameterize and calibr... |

54 | Business Cycles in a Small Open Economy. - Correia, Neves, et al. - 1995 |

48 | Is growth exogenous? Taking Mankiw, Romer, and Weil seriously,
- Bernanke, Gurkaynak
- 2001
(Show Context)
Citation Context ...Database (through Datastream) with the exception of the total population series, which comes from the World Development Indicators. The employment series is extended back to 1987 using Neumeyer and Perri (2005). For Mexico, quarterly hours per worker in manufacturing is calculated from OECD data as (total hours in manufacturing)/(total employment in manufacturing). This ratio is then used to calculate total hours from total employment. The capital stock series is calculated using the perpetual inventory method. The Penn World Tables report gross fixed capital formation starting in 1950. As in Bernanke and Gurkaynak (2002), we assume that capital and output grew at the same rate between 1950 and 1960. The initial capital stock for 1949 is then calculated as the ratio of investment in 1950 to the sum of the depreciation rate and annual average growth rate for 1950–60. We use a 10 percent annual depreciation rate. Starting with the capital stock in 1949 and updating using the data for investment from the Penn World Tables and the depreciation rate emerging market business cycles 101 of 10 percent, we arrive at the capital stock for 1980. After 1980 we use the quarterly investment series from OECD. The quarterly s... |

38 |
Large Sample Properties of Generalized
- Hansen
- 1982
(Show Context)
Citation Context ...ed at the benchmark values reported in table 3. When not estimated, we set and .r p 0.01 r p 0.95g z V. Results A. Parameter Estimates In this subsection, we estimate the parameters of the model by matching the relatively informative moments discussed in the previous section. Specifically, the theoretical moments of the model are functions of the underlying parameters. We estimate the parameters using GMM by minimizing the squared difference between the model and empirical moments. When the number of moments exceeds the number of parameters, we use the optimal weighting matrix as described by Hansen (1982). We begin by estimating the two variance parameters, jg and jz, and then estimate the full set of productivity parameters. Figure 4 and the intuition of the permanent income hypothesis suggest that the relative variance of consumption is particularly informative regarding the importance of trend shocks. Column 1 of table 4 reports the estimates of jg and jz obtained by matching the empirical standard deviations of filtered income and consumption. With two parameters and two moments, we match the two empirical moments exactly. For Mexico, we estimate and . For Canada, our estimatesj p 2.81 j p... |

35 |
How big is the random walk
- Cochrane
- 1988
(Show Context)
Citation Context ... Nelson (1981)st show that such a decomposition always exists for an I(1) process: sr p t s , (9)t t t where a gt p am t e (10)t g t1 t( )1 rg is a random walk (with drift) and args p z (g m ) (11)t t t g( )1 rg is a stationary series. The relative magnitudes of jg and jz (as well as the respective autocorrelations) capture the importance of trend versus transitory shocks. A natural measure of the importance of trend shocks is the variance of Dt relative to the overall variance of Dsr : 2 2 2j a jgDt p . (12)2 2 2j (1 r ) jDsr g Dsr This is the conceptual measure advocated in Cochrane (1988). Cochrane shows that 1 2lim K Var (sr sr ) p j . (13)t tK Dt Kr The relative variance can be approximated empirically by fixing2 2j /jDt Dsr K and calculating the sample variances of and Dsr.8 The keysr srt tK challenge in practice is that (13) is valid only when K is very large. This is particularly troubling in the present context with only 25 years or so of data for many emerging markets. Choosing a relatively small lag length K will provide a good approximation only if the autocovariances go to zero quickly enough. This is a well-known empirical issue. The difficulty of detecting ... |

33 | Lending Booms, Sharp Reversals and Real Exchange Rate Dynamics".
- Gopinath
- 2004
(Show Context)
Citation Context ... in matching the autocovariance function of the empirical Solow residuals. Similar patterns emerge using the model estimates from the other columns of table 4 (not depicted). In short, the behavior of consumption and net exports over the business cycle implies productivity parameters that are borne out in the data. D. Sudden Stops A major challenge to models of emerging markets is explaining the large current-account reversals observed in the data, the so-called sudden stops. The sudden-stop phenomenon has been described in detail in Calvo and Reinhart (2000), Arellano and Mendoza (2002), and Gopinath (2004), among others. It is specifically associated with an abrupt and large reversal in net capital inflows and the current account. An example of the sudden-stop phenomenon is the Mexican Tequila crisis, when there was a 9.6-percentage-point reversal in the ratio of the trade balance to GDP, from a deficit of 3.8 percent to a surplus of 5.7 percent, between the third quarter of 1994 and the second quarter of 1995. Over 11 Our empirical series on Solow residuals is unavoidably noisy because of the limited availability of data for capacity utilization, materials used, a reliable measure of hours wor... |

24 | Is Growth Exogenous? Taking - Bernanke, Gürkaynak - 2001 |

24 | Permanent and Transitory Components of GNP - Cochrane - 1994 |

16 | Business Cycles in Emerging Markets: The Role of Interest Rates - Neumeyer, Perri - 2005 |

6 | Global Stock Markets Factbook - Standard, Poor’s |

6 | Emerging Stock Markets Factbook, - Standard, Poor’s - 2000 |

6 |
Emerging Market Business Cycles: The Cycle Is the
- Aguiar, Gopinath
- 2005
(Show Context)
Citation Context ... product of and G a) that would have a corresponding,ze more complicated dynamic process that would be isomorphic to our approach. 6 We have also considered quasi-linear preferences (“GHH” preferences introduced by Greenwood, Hercowitz, and Huffman [1988]) that take the form u p (C t t . These preferences have been used to generate large responses ofu 1jtG L ) /(1 j)t1 t consumption and labor to productivity shocks. This follows from the high degree of substitutability between leisure and consumption in the utility function, which eliminates the income effect on labor supply. As shown in Aguiar and Gopinath (2005), the main result concerning the relative importance of trend shocks is robust to these alternative preferences. emerging market business cycles 81 counted value of utility subject to the production function (1) and the per period resource constraint: 2f Kt1 mgC K p Y (1 d)K e K B q B . (4)t t1 t t t t t t1( )2 Kt Capital depreciates at the rate d, and changes to the capital stock entail a quadratic adjustment cost 2f Kt1 mg e K .t( )2 Kt We assume that international financial transactions are restricted to oneperiod, risk-free bonds. The level of debt due in period t is den... |

4 | Emerging Stock Markets Factbook 2000 - Standard, Poor’s - 2000 |

1 |
Why Is Consumption So Smooth?” Rev.
- Campbell, Deaton
- 1989
(Show Context)
Citation Context ...mption at business cycle frequencies even when we control for the already high income volatility. There is a large literature on the excessive “smoothness” of consumption in the U.S. data (see, e.g., =-=Campbell and Deaton 1989-=-). Of course, whether consumption is excessively smooth in developed economies or excessively volatile in emerging markets depends on the underlying process for income. Once we parameterize and calibr... |

1 | How Big Is the Random Walk in GNP?” J.P.E. 96 (October): 893–920. 102 journal of political economy - Cochrane - 1988 |