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Interest Rates and Business Cycles in Emerging Economies: The Role of Financial Frictions

Andrés Fernández Martin () and Adam Gulan ()
Authors registered in the RePEc Author Service: Carmen Pages

No 4129, IDB Publications (Working Papers) from Inter-American Development Bank

Abstract: Countercyclical country interest rates have been shown to be both a distinctive characteristic and an important driving force of business cycles in emerging market economies. In order to account for this, most business cycle models of emerging market economies have relied on ad hoc and exogenous countercyclical interest rate processes. This paper embeds a financial contract à la Bernanke et al. (1999) in a standard small open economy business cycle model that endogenously delivers countercyclical interest rates. The model is then applied to the data, drawn from a novel panel dataset for emerging economies that includes financial data, namely sovereign and corporate interest rates as well as leverage. It is shown that the model accounts well not only for countercyclical interest rates, but also for other stylized facts of emerging economies` business cycles, including the dynamics of leverage.

Keywords: Business cycle models; Emerging economies; Financial frictions (search for similar items in EconPapers)
Date: 2012-11
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Working Paper: Interest rates and business cycles in emerging economies: the role of financial frictions (2012) Downloads
Working Paper: Interest Rates and Business Cycles in Emerging Economies.The Role of Financial Frictions (2012) Downloads
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