The Transmission of US Shocks to Emerging Markets

Asli Leblebicioglu () and Kolver Hernandez

No 316, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: To study the transmission of US shocks to emerging markets, we develop and estimate an asymmetric two-country real business cycle model. The asymmetries in the model arise due to the differences in the size and the riskiness of the economies, as well as the financial frictions in the emerging markets. Using 17 quarterly time series for Mexico and the US from 1994.I to 2007.IV, we estimate a subset of the parameters of the model, including key parameters that define the shocks and frictions. We find that at business cycles frequencies US shocks explain 40% of the volatility in the growth rate of Mexico's GDP, and 30% of the volatility in consumption's growth rate. A historical decomposition of the data shows that the transmission of shocks occur throughout the business cycles in the sample. In particular, it shows that Mexico's growth substantially benefited from the US growth in the second part of the 1990s, but it was adversely hit by the 2001 US recession. By contrast, during the 1994-1995 Tequila crisis, Mexican economy's poor performance was driven only by domestic shocks. Counter-factual experiments show that spill-overs from the US would be lower if the financial market imperfections were less stringent in Mexico, and/or if part of the bilateral trade were diversified with the rest of the World.

Date: 2012
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