Real business cycles in emerging economies: the role of international growth and interest rate.

Abstract

This paper is aimed at developing a business-cycle model for a small open emerging economy (SOEE). The model is parameterized, calibrated, and simulated to rationalize two important stylized facts in a SOEE. The first one is that when the international interest rate increases, the growth rate of a SOEE is reduced. Secondly, when industrialized countries are in recession, a SOEE suffers an even larger reduction in their growth rate. The obtained results show that if exports respond negatively to the international interest rate or exports are reduced due to an international recession, the aggregated consumption of the domestic economy is substantially more volatile than an economy where exports do not react. Moreover, this paper provides a possible explanation to the puzzle that developing countries suffer a recession not only when industrialized countries are in recession, but also when they are growing too fast.