Business cycles in emerging markets: The role of liability dollarization and valuation effects

Stefan Notz and Peter Rosenkranz

International Review of Economics & Finance, 2021, vol. 76, issue C, 424-450

Abstract: Understanding differences in business cycle phenomena between Emerging Market Economies (EMEs) and industrialized countries has been at the center of recent research on macroeconomic fluctuations. We investigate whether these are linked to credit market imperfections. To this end, we develop a small open economy Dynamic Stochastic General Equilibrium (DSGE) framework featuring both permanent and transitory productivity shocks, endogenous exchange rate movements, and liability dollarization and valuation affects, thereby accounting for the fact that emerging markets are facing difficulties in borrowing in domestic currency on international capital markets. We estimate our model using Bayesian techniques for several EMEs, thereby controlling for potential heterogeneity across countries. Our main findings regarding EMEs’ business cycles are (i) despite financial frictions, trend shocks are the main determinant of macroeconomic fluctuations, (ii) accounting for liability dollarization ameliorates the model fit, and (iii) valuation effects on average stabilize changes in the net foreign asset position.

Keywords: Emerging markets; Liability dollarization; Valuation effects; Financial frictions; Real business cycles; DSGE model; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E13 E44 F32 F34 F41 F44 F47 O11 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056021000757
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:76:y:2021:i:c:p:424-450

DOI: 10.1016/j.iref.2021.04.010

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().