Business cycles in emerging economies: the role of interest rates

Pablo Neumeyer and Fabrizio Perri

No 335, Staff Report from Federal Reserve Bank of Minneapolis

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: Interest rates; Business cycles (search for similar items in EconPapers)
Date: 2004
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Published in Journal of Monetary Economics> (Vol. 52, No. 2, March 2005, pp. 345-380)

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Related works:
Journal Article: Business cycles in emerging economies: the role of interest rates (2005)
Working Paper: Business Cycles in Emerging Economies: The Role of Interest Rates (2004)
Working Paper: Business Cycles in Emerging Economies: The Role of Interest Rates (2004)
Working Paper: Business Cycles in Emerging Economies:The Role of Interest Rates (2001)
Working Paper: Business Cycles in Emerging Economies: the role of interest rates (1999)
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