Are Business Cycles Different in Asia and Latin America?


Are Business Cycles Different in Asia and Latin America?
By Alexander W. Hoffmaister and Jorge Roldós

Understanding business cycles is the first step in designing appropriate
stabilization policies . Although there is no a priori reason to think that
business cycles are different in industrialized and developing countries, the
faster growth and greater volatility in developing countries, combined with the
recent emphasis in the literature on the connection between trends and cycles,
suggests that there could be some interesting differences.

This paper compares the properties of the business cycles in Asia and in Latin
America using a structural vector autoregression approach that encompasses
equilibrium and disequilibrium views of the business cycle. The paper thus
seeks to further our understanding of the relative importance of the different
factors or shocks that drive business fluctuations in the developing countries.
The methodology used allows the documentation of the dynamic impact of these
shocks on key macroeconomic variables (output, real exchange rate, trade
balance, and prices) in a framework that simultaneously considers shocks
emanating from the global environment (world interest rates and terms of trade)
and shocks of domestic origin (supply, fiscal, and nominal).

The evidence for the developing countries in Asia and in Latin America
suggests that, as in many industrialized countries, (i) the main source of
output fluctuations are supply shocks, even in the short run; (ii) real
exchange rates are mostly driven by fiscal shocks; and (iii) terms of trade
shocks appear to play a small role in output and real exchange rate
fluctuations but are important determinants of the trade balance. The paper
also suggests that developing countries in these two regions differ: in Latin
America, external shocks--in particular, world interest rate shocks--and demand
shocks affect output fluctuations more than in Asia. Nominal shocks appear to
affect these developing countries differently but in general play a small role
in GDP and real exchange rate fluctuations.