Equity Returns and Business Cycles in Small Open Economies

40 Pages Posted: 16 Sep 2011 Last revised: 20 Aug 2013

See all articles by Mohammad R. Jahan-Parvar

Mohammad R. Jahan-Parvar

Board of Governors of the Federal Reserve System

Xuan Liu

East Carolina University - Department of Economics

Philip Rothman

East Carolina University - Department of Economics

Date Written: June 1, 2012

Abstract

This is the first paper in the DSGE literature to match key business cycle moments and long-run equity returns in a small open economy with production. These results are achieved by introducing four modifications to a standard real business cycle model: (1) borrowing and lending costs are imposed to increase the volatility of the marginal rate of substitution over time; (2) capital adjustment costs are assumed to make equity returns more volatile; (3) GHH preferences are employed to smooth consumption and (4) a working capital constraint to generate countercyclical trade balances. Our results are based on data from Argentina, Brazil, and Chile.

Keywords: Asset Pricing, Equity Returns, Dynamic Stochastic General Equilibrium Model, Real Business Cycle, Small Open Economy

JEL Classification: E32, E44, F41, G12, G15

Suggested Citation

Jahan-Parvar, Mohammad R. and Liu, Xuan and Rothman, Philip, Equity Returns and Business Cycles in Small Open Economies (June 1, 2012). Journal of Money, Credit, and Banking, 45(6), 1117-1146. DOI: 10.1111/jmcb.12046. Available at SSRN: https://ssrn.com/abstract=1927637 or http://dx.doi.org/10.2139/ssrn.1927637

Mohammad R. Jahan-Parvar (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/mrjahan/

Xuan Liu

East Carolina University - Department of Economics ( email )

Brewster Building
Greenville, NC 27858
United States

Philip Rothman

East Carolina University - Department of Economics ( email )

Brewster Building
Greenville, NC 27858
United States
919-328-6151 (Phone)
919-328-6743 (Fax)

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