Sources of Fluctuations

Sunghyun Kim () and Ayhan Kose

Working Paper from Harvard University OpenScholar

Abstract: We analyze the sources of macroeconomic fluctuations in the emerging countries in the Middle East and North Africa (MENA) region using a dynamic stochastic general equilibrium model. The model economy captures some important structural characteristics of the MENA countries and can replicate the main properties of their business cycles. The results suggest that a substantial fraction of cyclical fluctuations in the MENA countries is explained by terms of trade shocks, which account for more than 60 percent of the variation in aggregate output. They also explain the bulk of cyclical fluctuations in aggregate consumption. Domestic productivity shocks explain close to 40 percent of business cycle variation in aggregate output. Government spending shocks and world interest shocks are also important in accounting for the volatility of business cycles in certain macroeconomic variables, but their overall effect on the dynamics of aggregate output appears to be relatively small.

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