Emerging Market Business Cycles: The Cycle Is the Trend

By Mark Aguiar, Gita Gopinath. Journal of Political Economy, 2007

1,572 citations recorded by the source corpus.

Emerging market business cycles exhibit strongly countercyclical current accounts, consumption volatility that exceeds income volatility, and “sudden stops” in capital inflows. These features contrast with developed small open economies. Nevertheless, we show that a standard model characterizes both types of markets. Motivated by the frequent policy regime switches observed in emerging markets, our premise is that these economies are subject to substantial volatility in trend growth. Our methodology exploits the information in consumption and net exports to identify the persistence of productivity. We find that shocks to trend growth—rather than transitory fluctuations around a stable trend—are the primary source of fluctuations in emerging markets. The key features of emerging market business cycles are then shown to be consistent with this underlying income process in an otherwise standard equilibrium model.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/36db80534269df1986a8e3c72b27edec9f0d43aa

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Citations in the corpus

News, Noise, and Fluctuations: An Empirical Exploration (2013, neutral): “From equations (1)-(3) and (6) above, we obtain ct = xt|t + ρ 1− ρt|t − xt−1|t).”
Heterogeneous Borrowers in Quantitative Models of Sovereign Default (2009, neutral): “1See, for example, Aguiar and Gopinath (2007), Neumeyer and Perri (2005), and Uribe and Yue (2006).”
Real Business Cycles in Emerging Countries (2010, background): “This result is in stark contrast with the findings of Aguiar and Gopinath (2007) (henceforth AG), namely, that the RBC model driven by permanent shifts to productivity performs well over the shorter period 1980-2003.”
Growth, Slowdowns, and Recoveries (2019, positive): “Aguiar and Gopinath (2007) find that shocks to trend growth are the primary source of fluctuations in emerging markets. Comin and Gertler (2006) show that a stochastic version of an expanding variety endogenous growth model generates medium-term cycles that are driven by the dynamics of R&D. Kung an”
Asiaphoria Meets Regression to the Mean (2014, positive): “This is a very different view than the standard trend-cycle model used in industrial country macroeconomics, but it appears to be much more descriptive of developing countries where “the cycle is the trend” (Aguiar and Gopinath 2007).”
The Forgotten History of Domestic Debt (2011, neutral): “See also Aguiar and Gopinath (2007) for a model in which the pro-cyclical behaviour of the current account can be rationalised by the high ratio of permanent to transitory shocks in emerging markets.”
Sovereign default and debt renegotiation (2010, background): “In equilibrium, sovereign bonds are priced to compensate creditors for the risks of default and restructuring.”
Rethinking the Effects of Financial Globalization (2016, neutral): “To understand equations (6) and (7), note that there are three relevant consumptions for individual i: consumption during youth, consumption during old age if zt+1 = E, and consumption during old age if zt+1 = N .”
Inspecting the Mechanism: Leverage and the Great Recession in the Eurozone (2017, background): “Even if the bulk of the literature on sudden stops has put credit constraints at the center of the story, Gopinath (2004) and Aguiar and Gopinath (2007) have focused on an alternative explanation with TFP shocks taking center stage. Gopinath (2004) proposes a model with a search friction to generate”
Long-Duration Bonds and Sovereign Defaults (Revised July 2009) (2009, neutral): “…between our paper and previous studies is that, while previous quantitative studies assume that sovereign bonds mature after one quarter, we assume that the gov- 1See, for instance, Aguiar and Gopinath (2007), Neumeyer and Perri (2005), Schmitt-Grohé and Uribe (2003), and Uribe and Yue (2006).”
Learning from History: Volatility and Financial Crises (2016, background): “The answer could easily depend on the time period or the country under consideration (see for instance Aguiar and Gopinath, 2007, who show that the business cycles of emerging countries are shorter than the developed ones).”