Liquidity Contraints and Business Cycles in Developing Economies

Benoît Carmichael, Sikoro Keita and Lucie Samson
Additional contact information
Benoît Carmichael: Département d'Économique, Université Laval
Sikoro Keita: USAID/Mali Results Center
Lucie Samson: Département d'Économique, Université Laval

Review of Economic Dynamics, 1999, vol. 2, issue 2, 370-402

Abstract: Open economy extensions of real business cycle models, even if generally successful, have met some difficulties replicating a few important stylized facts. In particular these models tend to predict excessive consumption smoothing and consumption correlation across countries. The observed negative correlation between the trade balance and output in developing countries, the variability of the trade balance and its correlation with the terms of trade have also proven difficult to reproduce. The paper considers how introduction of incomplete markets in the form of liquidity constraints can alleviate these problems. This analysis suggests that adding liquidity constraints helps predict the variability of consumption relative to output. It also improves our estimate of the correlation between the trade balance and output. The model correctly replicates the small positive correlation between the terms of trade and the trade balance. However, it slightly underpredicts the variability of the trade balance when fifty percent of the consumers are assumed to be liquidity constrained. (Copyright: Elsevier)

Keywords: financial constraints; developing economy; business cycles (search for similar items in EconPapers)
JEL-codes: E13 E32 E44 (search for similar items in EconPapers)
Date: 1999
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1006/redy.1998.0054 Full text (application/pdf)
Access to full texts is restricted to ScienceDirect subscribers and ScienceDirect institutional members. See http://www.sciencedirect.com/ for details.

Related works:
Working Paper: Cycles economiques au Senegal: Une approche RBC (1995)
Working Paper: Cycles économiques au Sénégal: une approche RBC (1995)
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:red:issued:v:2:y:1999:i:2:p:370-402

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1006/redy.1998.0054

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().