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Parameter drifts, misspecification and the real exchange rate in emerging countries

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  • Seoane, Hernán D.

Abstract

This paper reviews the baseline framework for the analysis of emerging economies. Using Argentinean data, I estimate a small open economy model with stochastic trend, working capital constraint and augmented with time-varying parameters. I find that “structural” technological and financial parameters of one-sector model are time-varying during 1936–2006. Time-varying parameters correlate with the real exchange rate, suggesting potential misspecification of the one-sector model. Therefore, I propose a two-sector model that endogenously accounts for the real exchange rate. In this model, stationary productivity shocks and the country premium together explain a large share of the variability observed in the data.

Suggested Citation

  • Seoane, Hernán D., 2016. "Parameter drifts, misspecification and the real exchange rate in emerging countries," Journal of International Economics, Elsevier, vol. 98(C), pages 204-215.
    • Handle: RePEc:eee:inecon:v:98:y:2016:i:c:p:204-215
    DOI: 10.1016/j.jinteco.2015.09.006
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    Cited by:

    1. Curran, Michael & Velic, Adnan, 2019. "Real exchange rate persistence and country characteristics: A global analysis," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 35-56.
    2. Seoane, Hernán D. & Yurdagul, Emircan, 2019. "Trend shocks and sudden stops," Journal of International Economics, Elsevier, vol. 121(C).
    3. Dave, Chetan & Sorge, Marco, 2023. "Fat Tailed DSGE Models: A Survey and New Results," Working Papers 2023-3, University of Alberta, Department of Economics.
    4. Hwang, Seolwoong & Kim, Soyoung, 2022. "Real business cycles in emerging countries: Are Asian business cycles different from Latin American business cycles?," Journal of International Money and Finance, Elsevier, vol. 129(C).
    5. Florencia S. Airaudo & Hernán D. Seoane, 2021. "The Trend-cycle Connection," Working Papers 97, Red Nacional de Investigadores en Economía (RedNIE).

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    More about this item

    Keywords

    Emerging economies; Real business cycle; Parameter drift; Real exchange rate;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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