Accounting for Output Drops in Latin America

Ruy Lama

Review of Economic Dynamics, 2011, vol. 14, issue 2, 295-316

Abstract: This paper evaluates which type of models can account for recent episodes of output drops in Latin America. I develop an open economy version of the business cycle accounting methodology (Chari, Kehoe, and McGrattan, 2007) in which output fluctuations are decomposed into four sources: total factor productivity (TFP), a labor wedge, a capital wedge, and a bond wedge. The paper shows that the most promising models are the ones that induce fluctuations of TFP and the labor wedge. On the other hand, models of financial frictions that translate into a bond or capital wedge are not successful in explaining output drops in Latin America. The paper also discusses the implications of these results for policy analysis using alternative DSGE models. (Copyright: Elsevier)

Keywords: Business cycle accounting; DSGE models; Small open economy; Sudden stops (search for similar items in EconPapers)
JEL-codes: E32 F41 O47 O54 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (35)

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DOI: 10.1016/j.red.2010.12.001

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