Business Cycles in Emerging Markets: The Role of Durable Goods and Financial Frictions
IMF Working Papers, June 1, 2011
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- Business Cycles in Emerging Markets: The Role of Durable Goods and Financial Frictions
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Bibliographic details
- Published: June 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455259380.001
Summary and research question
- Examines how durable goods and financial frictions shape the business cycle of a small open economy subject to shocks to trend and transitory shocks.
- Empirical observation: nondurable consumption is not as volatile as income for both developed and emerging market economies.
- Core model implication: shocks to trend play a less important role than previously documented.
- Financial frictions enhance the model’s ability to match key business cycle properties of emerging economies.
- Interaction result: a countercyclical borrowing premium interacting with the nature of durable goods yields highly volatile consumption and very countercyclical net exports.
Key findings (empirical and model-based)
- Nondurable consumption volatility: nondurable consumption is less volatile than income in both developed and emerging market economies.
- Role of trend shocks: simulations imply shocks to trend play a less important role than previously documented.
- Financial frictions: including financial frictions improves the model’s fit to emerging market business cycle properties.
- Borrowing premium and durables interaction:
- A countercyclical borrowing premium interacts with durable goods.
- This interaction delivers highly volatile consumption.
- It also delivers very countercyclical net exports.
Policy-relevant implications
- Accounting for durable goods behavior is important for understanding consumption volatility in emerging markets.
- Financial frictions, particularly countercyclical borrowing premia, materially affect macroeconomic volatility and external balances.
- Policy design for emerging markets should consider how borrowing premia and durable goods dynamics amplify business cycle fluctuations and net export cyclicality.
Subject areas and keywords
- Subject: Business cycles, Consumption, Economic growth, Economic theory, Emerging and frontier financial markets, Financial frictions, Financial markets, Income, National accounts
- Keywords: borrowing premium, Business cycles, consumer durables, Consumption, consumption expenditure, consumption goods, durable goods, durables, Emerging and frontier financial markets, emerging markets, financial frictions, Income, open economy, real business cycles, trade balance, utility share, WP
Content in this bundle
- _wp11133 - References