'Tropical' Real Business Cycles? A Bayesian Exploration

42 Pages Posted: 14 Oct 2011

Date Written: September 8, 2011

Abstract

Can frictionless small open economy models driven solely by technology shocks account for business cycles in developing countries? We don't find evidence of it. We build a DSGE model that jointly includes a variety of real perturbations in addition to technology shocks, such as procyclical fiscal policies; terms of trade fluctuations; and perturbations to the foreign interest rate coupled with financial frictions and estimate it using Bayesian methods on high and low frequency data from a developing - and "tropical" - country, Colombia. We find interest rate shocks to be crucial and that financial frictions play a central role as propagating mechanisms of transitory technology shocks. These two driving forces alone can account well for the observed properties of the Colombian business cycle. Other structural shocks such as terms of trade fluctuations and level shifts in the technology process do not appear to be relevant in the past decade and a half, but their importance increases when a longer span of data is considered.

Keywords: Business cycles, developing economies, dynamic stochastic general

JEL Classification: E32, F41, F47, C11

Suggested Citation

Martin, Andres Fernandez, 'Tropical' Real Business Cycles? A Bayesian Exploration (September 8, 2011). Documento CEDE No. 2011-41, Available at SSRN: https://ssrn.com/abstract=1944179 or http://dx.doi.org/10.2139/ssrn.1944179

Andres Fernandez Martin (Contact Author)

Universidad de los Andes, Colombia ( email )

Carrera Primera # 18A-12
Bogota, DC D.C. 110311
Colombia
5713394949 ext 4498 (Phone)

HOME PAGE: http://economia.uniandes.edu.co/profesores/planta/Fernandez_Andres

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