Research Discussion Papers, Bank of Finland
No 23/2012:
Interest rates and business cycles in emerging economies: The role of financial frictions
Andrés Fernández ()
and Adam Gulan ()
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. We embed a
financial contract ŕ la Bernanke et al. (1999) into a standard small open
economy business cycle model that endogenously delivers countercyclical
interest rates. We then take the model to the data. For this purpose we
build a novel panel dataset for emerging economies that includes financial
data, namely sovereign and corporate interest rates as well as leverage. We
show 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; (follow links to similar papers)
JEL-Codes: E32; E44; F41; (follow links to similar papers)
48 pages, June 18, 2012
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- This paper is published as:
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Fernández, Andrés and Adam Gulan, (2015), 'Interest rates and business cycles in emerging economies: The role of financial frictions', American Economic Journal: Macroeconomics, Vol. 7, July, No. 3, pages 153-188
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