Emerging Market Business Cycles: The Cycle is the Trend

45 Pages Posted: 20 Sep 2004

See all articles by Mark Aguiar

Mark Aguiar

Princeton University

Gita Gopinath

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2004

Abstract

Business Cycles in emerging markets are characterized by strongly counter-cyclical current accounts, consumption volatility that exceeds income volatility and dramatic sudden stops' in capital inflows. These features contrast with developed small open economies and highlight the uniqueness of emerging markets. Nevertheless, we show that both qualitatively and quantitatively a standard dynamic stochastic small open economy model can account for the behavior of both types of markets. Motivated by the observed frequent policy regime switches in emerging markets, our underlying premise is that these economies are subject to substantial volatility in the trend growth rate relative to developed markets. Consequently, shocks to trend growth are the primary source of fluctuations in these markets rather than transitory fluctuations around a stable trend. When the parameters of the income process are structurally estimated using GMM for each type of economy, we find that the observed predominance of permanent shocks relative to transitory shocks for emerging markets and the reverse for developed markets explains differences in key features of their business cycles. Lastly, employing a VAR methodology to identify permanent shocks we find further support for the notion that the cycle is the trend' for emerging economies.

Suggested Citation

Aguiar, Mark and Gopinath, Gita, Emerging Market Business Cycles: The Cycle is the Trend (September 2004). NBER Working Paper No. w10734, Available at SSRN: https://ssrn.com/abstract=587948

Mark Aguiar

Princeton University ( email )

Princeton, NJ 08544-1021
United States

Gita Gopinath (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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