Title Business Cycles in Small Developed Economies : the Role of Terms of Trade and Foreign Interest Rate Shocks

Published International Monetary Fund 2008

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Description 1 online resource (27 pages) Series IMF working paper ; WP/08/86 IMF working paper ; WP/08/86. Contents I. Introduction; II. Empirical Regularities; III. Literature Review; IV. The Model; A. Households; B. Firms; C. Definition of a Competitive Equilibrium; V. Steady State and Calibration; A. Shock Processes; VI. Simulations and Impulse Responses; A. Impulse -- Responses; B. Simulations; VII. Conclusions; References; Tables; 1. Business Cycles Indicators for Developed Economies, Annual Data, 1980 -- 2003; 2. Business Cycles Indicators for Developed Economies, Quarterly Data, 1980 -- 2003; 3. Calibrated Parameters and Macroeconomic Ratios; 4. Shocks Processes 5. Data Moments, Standard and Benchmark Model Simulations6. Model Simulations, Different Measures of R*; 7. Model Simulations, Different Intertemporal Elasticities of Substitution; Figure; 1. Impulse -- Response Functions Summary Empirical evidence for small developed economies finds that consumption is procyclical and as volatile as output, and real net exports are coutercyclical. Earlier studies have not been able to reproduce these regularities in a DSGE small open economy model when productivity shocks drive the business cycles and households have a normal intertemporal elasticity of substitution. Instead, these studies have reduced this elasticity to make consumption more procyclical and volatile and real net exports countercyclical. This paper shows that a standard model can reproduce these regularities, without lowering the intertemporal substitution, if the terms of trade and foreign interest rate are added as source of business cycle fluctuations. These shocks, compared to productivity shocks, make consumption and investment more volatile and procyclical relative to output, and make real net exports countercyclical Subject Business cycles -- Econometric models Business cycles -- Developing countries -- Econometric models Business cycles -- Econometric models Developing countries Form Electronic book Author Guajardo, Jaime, author. ISBN 1283517590 9781283517591 9781451914016 1451914016 ISSN 2227-8885

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