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Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions

Andrés Fernández Martin () and Adam Gulan ()

American Economic Journal: Macroeconomics, 2015, vol. 7, issue 3, 153-88

Abstract: Countercyclical country interest rates have been shown to be an important characteristic of business cycles in emerging markets. In this paper we provide a microfounded rationale for this pattern by linking interest rate spreads to the dynamics of corporate leverage. For this purpose we embed a financial accelerator into a business cycle model of a small open economy and estimate it on a novel panel dataset for emerging economies that merges macroeconomic and financial data. The model accounts well for the empirically observed countercyclicality of interest rates and leverage, as well as for other stylized facts. (JEL E13, E32, E43, E44, F41, O11)

JEL-codes: E13 E32 E43 E44 F41 O11 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/mac.20120141
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Working Paper: Interest Rates and Business Cycles in Emerging Economies.The Role of Financial Frictions (2012) Downloads
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Handle: RePEc:aea:aejmac:v:7:y:2015:i:3:p:153-88