Parameter drifts, misspecification and the real exchange rate in emerging countries

Hernán Seoane

Journal of International Economics, 2016, vol. 98, issue C, 204-215

Abstract: This paper reviews the baseline framework for the analysis of emerging economies. Using Argentinean data, I estimate a small open economy model with stochastic trend, working capital constraint and augmented with time-varying parameters. I find that “structural” technological and financial parameters of one-sector model are time-varying during 1936–2006. Time-varying parameters correlate with the real exchange rate, suggesting potential misspecification of the one-sector model. Therefore, I propose a two-sector model that endogenously accounts for the real exchange rate. In this model, stationary productivity shocks and the country premium together explain a large share of the variability observed in the data.

Keywords: Emerging economies; Real business cycle; Parameter drift; Real exchange rate (search for similar items in EconPapers)
JEL-codes: E32 F32 F41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:98:y:2016:i:c:p:204-215

DOI: 10.1016/j.jinteco.2015.09.006

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