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Business Cycles in Emerging Markets: the Role of Durable Goods and Financial Frictions

Author

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  • Álvarez, Fernando
  • Brandao-Marques, Luis
  • Toledo, Manuel

Abstract

There is a growing literature studying business cycles in emerging economies. This paper contributes to this literature by examining how durable goods and financial frictions shape cyclical fluctuations in a small open economy subject to transitory and permanent shocks. We find that permanent shocks play a less important role driving the cycle in emerging economies than previously documented. We also find that financial frictions are crucial to explain some key business cycle properties of these economies. In our quantitative model, a countercyclical borrowing premium interacts with the purchase of durables to deliver highly volatile consumption and strongly countercyclical net exports.

Suggested Citation

  • Álvarez, Fernando & Brandao-Marques, Luis & Toledo, Manuel, 2012. "Business Cycles in Emerging Markets: the Role of Durable Goods and Financial Frictions," Research Department working papers 243, CAF Development Bank Of Latinamerica.
    • Handle: RePEc:dbl:dblwop:243
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    File URL: https://scioteca.caf.com/handle/123456789/243
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    Cited by:

    1. Juan Carlos Hatchondo & Leonardo Martinez & César Sosa-Padilla, 2016. "Debt Dilution and Sovereign Default Risk," Journal of Political Economy, University of Chicago Press, vol. 124(5), pages 1383-1422.
    2. Leonardo Martinez & Juan Hatchondo, 2017. "Sovereign Cocos and the Reprofiling of Debt Payments," 2017 Meeting Papers 1435, Society for Economic Dynamics.
    3. Masahiro Kodama, 2013. "External Shocks and High Volatility in Consumption in Low-Income Countries," The Developing Economies, Institute of Developing Economies, vol. 51(3), pages 278-302, September.

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