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

April 1, 2008

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Format: Chicago

Jaime Guajardo. Business Cycles in Small Developed Economies: The Role of Terms of Trade and Foreign Interest Rate Shocks, (USA: International Monetary Fund, 2008) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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: Consumption, Exports, Labor, Real exports, Terms of trade

Keywords: Open economy, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/086
Stock No:

WPIEA2008086
ISBN:

9781451869477
ISSN:

1018-5941

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