Medium Term Business Cycles in Developing Countries

55 Pages Posted: 21 Sep 2011

See all articles by Diego Comin

Diego Comin

Harvard University - Business School (HBS)

Norman Loayza

World Bank - Research Department

Farooq Pasha

Boston College

Luis Servén

World Bank - Development Research Group (DECRG)

Date Written: September 2011

Abstract

Business cycle fluctuations in developed economies (N) tend to have large and persistent effects on developing countries (S). We study the transmission of business cycle fluctuations for developed to developing economies with a two-country asymmetric DSGE model with two features: (i) endogenous and slow diffusion of technologies from the developed to the developing country, and (ii) adjustment costs to investment flows. Consistent with the model we observe that the flow of technologies from N to S co-moves positively with output in both N and S. After calibrating the model to Mexico and the U.S., it can explain the following stylized facts: (i) U.S. and Mexican output co-move more than consumption; (ii) U.S. shocks have a larger effect on Mexico than in the U.S.; (iii) U.S. business cycles lead over medium term fluctuations in Mexico; (iv) Mexican consumption is more volatile than output.

Keywords: business cycles in developing countries, co-movement between developed and developing economies, extensive margin of trade, FDI, product life cycle, volatility

JEL Classification: E3, O3

Suggested Citation

Comin, Diego and Loayza, Norman and Pasha, Farooq and Servén, Luis, Medium Term Business Cycles in Developing Countries (September 2011). CEPR Discussion Paper No. DP8574. Available at SSRN: https://ssrn.com/abstract=1931083

Diego Comin

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Norman Loayza (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Farooq Pasha

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Luis Servén

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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