Business Cycles in Emerging Economies: The Role of Interest Rates

59 Pages Posted: 12 Aug 2004

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)

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Date Written: July 2004

Abstract

We find that in a sample of emerging economies, business cycles are more volatile than in developed ones, real interest rates are countercyclical and lead the cycle, consumption is more volatile than output, and net exports are strongly countercyclical. We present a model of a small open economy, where the real interest rate is decomposed in an international rate and a country risk component. Country risk is affected by fundamental shocks but, through the presence of working capital, also amplifies the effects of those shocks. The model generates business cycles consistent with Argentine data. Eliminating country risk lowers Argentine output volatility by 27%, while stabilizing international rates lowers it by less than 3%.

Keywords: Country risk, financial crises, international business cycles, sudden stops, working capital

JEL Classification: E32, F32, F41

Suggested Citation

Neumeyer, Pablo A. and Perri, Fabrizio, Business Cycles in Emerging Economies: The Role of Interest Rates (July 2004). Available at SSRN: https://ssrn.com/abstract=575501

Pablo A. Neumeyer

Universidad Torcuato Di Tella ( email )

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

Fabrizio Perri (Contact Author)

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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