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Business cycles, informal economy, and interest rates in emerging countries

Jaroslav Horvath

Journal of Macroeconomics, 2018, vol. 55, issue C, 96-116

Abstract: This paper recognizes the importance of a large informal economy and interest rate fluctuations for business cycles in emerging countries. I document (1) a positive relationship between the relative volatility of consumption to output and the size of the informal economy, and (2) countercyclical interest rates in emerging countries. I show that in a two-sector real business cycle model of a small open economy with a poorly measured informal sector, an increase in country interest rate generates a contraction in output, consumption, investment, hours, an improvement in trade balance-to-output ratio, and an expansion of informal sector.

Keywords: Informal economy; Country risk; International business cycles (search for similar items in EconPapers)
JEL-codes: E26 E32 E43 F32 F41 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.jmacro.2017.10.002

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