Sources of Fluctuations in Emerging Markets: Structural Estimation with Mixed Frequency Data

This study explores the sources of aggregate fluctuations in emerging markets. For that purpose, I estimate a standard small open economy model for 18 countries combining annual and quarterly series. The proposed mixed frequency strategy allows us to extend the sample period typically back to 1950 exploiting annual datasets, while keeping the information present in shorter quarterly series. Importantly, I find that transitory technology shocks are the main driver of fluctuations in emerging markets, accounting for about 48% of output growth variance. In turn, permanent productivity shocks come in second place, explaining around 35% of output fluctuations. Conversely, in developed countries permanent technology shocks play a predominant role. In order to assess the relative merits of the mixed frequency estimation strategy, I perform a Monte Carlo experiment for a representative emerging economy. Interestingly, I find that estimations based only on short quarterly series exhibit large upward bias for the contribution of permanent technology shocks. Further, I show that the mixed frequency estimation delivers substantial efficiency gains and drastically reduces this bias.