Real Business Cycles in Emerging Economies: The Role of International Growth and Interest Rate

Abstract

<strong>T</strong>his paper is aimed at developing a business-cycle model for a small open emerging economy (SOEE). The model is parameterized, calibrated, and simulated to rationalize two important stylized facts in a SOEE. The first one is that when the international interest rate increases, the growth rate of a soee is reduced. Secondly, when industrialized countries are in recession, a soee suffers an even larger reduction in their growth rate. The obtained results show that if exports respond negatively to the international interest rate or exports are reduced due to an international recession, the aggregated consumption of the domestic economy is substantially more volatile than an economy where exports do not react. Moreover, this paper provides a possible explanation to the puzzle that developing countries suffer a recession not only when industrialized countries are in recession, but also when they are growing too fast.

External shocks and output composition: evidence from Nigeria

“…Besides the impact of trade and financial shocks, other studies have examined the spillover effects of variables such as world output, world interest rate and world price shocks on small open economies. In relation to this, Venegas-Martínez et al (2012) investigate the roles of international growth and the international interest rate on business cycle fluctuations of small open emerging economies (SOEEs). The authors establish a strong negative relationship between the level of economic activity and the cost of borrowing proxied with the international interest rate.…”