Business Cycles in Emerging Economies: The Role of Interest Rates

48 Pages Posted: 12 Nov 2008

See all articles by Pablo A. Neumeyer

Pablo A. Neumeyer

Universidad Torcuato Di Tella

Fabrizio Perri

Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: November 2001

Abstract

This paper documents the empirical relation between the interest rates that emerging economies face in international capital markets and their business cycles. The dataset used in the study includes quarterly data for Argentina during 1983-2000 and for Brazil, Mexico, Korea, and Philippines, during 1994-2000. In this sample, interest rates are very volatile, strongly countercyclical, and strongly positively correlated with net exports. Output is very volatile and consumption is more volatile than output. These regularities are common to all emerging economies in the sample, but are not observed in a developed economy such as Canada. The paper presents a dynamic general equilibrium model of a small open economy, in which (i) firms have to pay for a fraction of the input bill before production takes place, and in which (ii) the labor supply is independent of consumption. Using a version of the model calibrated to Argentina s economy, we find that interest rate shocks alone can explain 50% of output fluctuations and can generate business cycle patterns consistent with the regularities described above and with the major booms and recessions in Argentina in the last two decades. We conclude that interest rates are an important factor for explaining business cycles in emerging economies and further research should be devoted to fully understand their determination.

Keywords: Argentina, International business cycles, Country risk

Suggested Citation

Neumeyer, Pablo A. and Perri, Fabrizio, Business Cycles in Emerging Economies: The Role of Interest Rates (November 2001). NYU Working Paper No. S-MF-01-06, Available at SSRN: https://ssrn.com/abstract=1300241

Pablo A. Neumeyer (Contact Author)

Universidad Torcuato Di Tella ( email )

Minones 2177
C1428ATG
1428 Buenos Aires
Argentina
54 11 4792 6506 (Phone)

Fabrizio Perri

Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States
212-998-0251 (Phone)
212-995-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~fperri/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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United Kingdom

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