Emerging Market Business Cycles Revisited: Learning About the Trend

44 Pages Posted: 23 Apr 2008

See all articles by Emine Boz

Emine Boz

International Monetary Fund (IMF)

Christian Daude

Inter-American Development Bank (IADB)

Ceyhun Bora Durdu

Federal Reserve Board

Date Written: April 2008

Abstract

The data reveal that emerging markets do not differ from developed countries with regards to the variance of permanent TFP shocks relative to transitory. They do differ, however, in the degree of uncertainty agents face when formulating expectations. Based on these observations, we build an equilibrium business cycle model in which the agents cannot perfectly distinguish between the permanent and transitory components of TFP shocks. When formulating expectations, they assign some probability to TFP shocks being permanent even when they are purely transitory. This is sufficient for the model to produce "permanent-like" effects in response to transitory shocks. The imperfect information model calibrated to Mexico predicts a higher variability of consumption relative to output and a strongly negative correlation between the trade balance and output, without the predominance of trend shocks. The same model assuming perfect information and calibrated to Canada accounts for developed country business cycle regularities. The estimated relative variance of trend shocks in these two models is similar.

Keywords: Emerging markets, business cycles, learning, Kalman filter

JEL Classification: F41, E44, D82

Suggested Citation

Boz, Emine and Daude, Christian and Durdu, Ceyhun Bora, Emerging Market Business Cycles Revisited: Learning About the Trend (April 2008). FRB International Finance Discussion Paper No. 927. Available at SSRN: https://ssrn.com/abstract=1123981 or http://dx.doi.org/10.2139/ssrn.1123981

Emine Boz (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Christian Daude

Inter-American Development Bank (IADB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Ceyhun Bora Durdu

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
2024523775 (Phone)

HOME PAGE: http://www.ceyhunbora.com

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