On the Sources of Aggregate Fluctuations in Emerging Economies

56 Pages Posted: 26 Apr 2010 Last revised: 21 Jul 2021

See all articles by Roberto Chang

Roberto Chang

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics; National Bureau of Economic Research (NBER)

Andreas Fernandez

Rutgers, The State University of New Jersey - Rutgers University, Newark

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Date Written: April 2010

Abstract

Recent research on macroeconomic fluctuations in emerging economies has focused in two leading approaches: introducing a stochastic productivity trend, in addition to temporary productivity shocks; or allowing for foreign interest rate shocks coupled with financial frictions. This paper compares the two approaches empirically, and also evaluates a model that encompasses them, taking advantage of recent developments in the theory and implementation of Bayesian methods. The encompassing model assigns a significant role to interest rate shocks and financial frictions, but not to trend shocks, in generating and amplifying aggregate fluctuations. Formal model comparison exercises favor models with financial frictions over the stochastic trend model, although this is sensitive to the inclusion of measurement errors. Of the two financial frictions we consider, working capital versus spreads linked to expected future productivity, the latter emerges as key for a reasonable approximation to the data.

Suggested Citation

Chang, Roberto and Fernandez, Andreas, On the Sources of Aggregate Fluctuations in Emerging Economies (April 2010). NBER Working Paper No. w15938, Available at SSRN: https://ssrn.com/abstract=1594572

Roberto Chang (Contact Author)

Rutgers University, New Brunswick/Piscataway - Faculty of Arts and Sciences-New Brunswick/Piscataway - Department of Economics ( email )

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New Brunswick, NJ 08901
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Andreas Fernandez

Rutgers, The State University of New Jersey - Rutgers University, Newark ( email )

180 University Avenue
Newark, NJ 07102
United States

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