مشارکت در بازار مالی و چرخه کسب و کار در کشور حال توسعه

I explore the implications of limited participation in financial markets on a standard small open economy business cycle model. Despite its parsimony, the limited participation model developed in this paper improves over the standard model in terms of explaining two important features of business cycle facts of developing countries: high volatility of consumption, and high negative correlation between the trade balance and output. Limited participation model is then used to inspect the effects of financial development and integration on macroeconomic volatility. Under a standard calibration, limited participation model leads to the conclusion that financial development and integration are associated with higher investment and output volatility. Effect of more participation on consumption volatility is dependent on the specification of the risk premium function.

A close examination of the existing data on financial markets indicates that participation in financial markets is very limited in developing countries.1 I incorporate this observation into a standard open economy real business cycle model.2 I show numerically that the modification of the standard model in this way improves the model's performance in terms of explaining the developing country business cycle. Despite its parsimony, the model developed in this paper performs better than the standard model in terms of explaining the two important features of the business cycle facts of developing countries: first, it generates a higher consumption volatility, and second, a higher negative trade balance–output correlation. Limited participation model is then used to inspect the effects of financial development and integration on macroeconomic volatility. It turns out that, under a standard calibration, limited participation model leads to the conclusion that financial development and integration are associated with higher investment and output volatility. However, the effect of higher participation on consumption volatility depends on the specification of the risk premium function. In these aspects, limited participation model is consistent with some of the recent empirical findings but not with others (see below). This paper contributes to several strands of literature. First, the model presented in this paper extends the standard small open economy business cycle model constructed by Mendoza (1991) and slight variations of the same which have been widely used in literature.3 Beginning with Mendoza (1991), researchers have attempted to extend closed economy real business cycle models to the open economy setting. However, with a few exceptions4, the focus has not been on developing countries. Later in the paper, I show that, when calibrated to an average developing country, the standard model cannot account for highly countercyclical trade balances and highly volatile consumption. This finding leads one to explore modifications that should be made to the standard model. This study allows for limited financial market participation. I discuss later in the paper why this is a meaningful modification by inspecting the financial sector data across countries. The second contribution of this paper is made to the narrow literature on the linkage between financial development and integration and the volatility in developing economies. Recent empirical studies provide mixed evidence on the effects of financial development and integration on macroeconomic volatility. For example, Köse et al. (2003) find that financial integration (up to a threshold) is associated with a higher relative volatility of consumption, which is at odds with the notion that financial integration enhances international risk sharing opportunities. Tiryaki (2003), on the other hand, finds that in the short run, financial development leads to a lower volatility of investment, leaves output volatility unchanged, but leads to a higher volatility of consumption. In a recent study Denizer et al. (2002) find that financial development leads to reductions in investment, consumption and output volatility. Hahn (2003) analyzes the OECD economies and argues that financial development may lead to increased or decreased volatility depending on whether shocks are monetary or real. In this paper I provide a framework to analyze the effects of financial development and integration on macroeconomic volatility from the perspective of a greater participation in financial markets. I find that, when modified to include limited participation in the financial markets, an otherwise standard small open economy model implies that financial development and integration and the ensuing greater financial market participation can be associated with increased output and investment volatility. The impact of more participation on consumption volatility depends on the specification of the risk premium function. If the risk premium is a function of an indicator of solvency, the consumption volatility goes down with more participation, whereas it goes up when the risk premium is specified to be a function of the level of debt as in Schmitt-Grohé and Uribe (2003). Some of the agents in the limited participation model economy I develop do not have access to financial markets whatsoever, and consume only as much as their labor income allows. These types of consumers have been called “rule-of-thumb consumers” following the work of Campbell and Mankiw (1989). Thus, this study also adds to the growing literature dealing with the impact of the presence of rule-of-thumb consumers on the macroeconomy.5 The rest of the paper will be organized as follows: in next section, the business cycle facts for a large number of countries with cross sectional income differences will be briefly discussed. A set of financial development and integration indicators for the same sample of countries will be examined in Section 3. In Section 4, the standard model and the limited participation model will be presented. In Section 5, extensive numerical analyses will be undertaken by calibrating my limited participation model and the standard model to developing country data, comparing the implications of the two. Several experiments with the model of limited participation in the financial markets will be run in order to explore the implications of financial development and integration in Section 6. Section 7 will conclude.

The standard small open economy real business cycle model assumes that every agent in the economy has access to stock and international borrowing/lending markets. While this can be a plausible assumption for developed countries, this paper provides empirical evidence that the same is not true for developing countries, which in general are characterized by underdeveloped financial markets. The existing data indicates that the stock markets are shallow (if exists), credit availabilities and financial access points are limited compared to developed countries. Also, the data indicates that significant impediments to entrepreneurship exist in developing countries. In light of the inspection of the financial data, this paper undertakes a modification of the standard model and constructs a model that features limited participation in stock and international asset markets. Via numerical analyses, it is shown that limited participation model outperforms the standard model when calibrated to an average developing small open economy. In particular, limited participation model developed in Section 4 leads to a higher consumption volatility and a higher negative correlation between the trade balance and the GDP. Also, limited participation model can generate countercyclical trade balances even when Cobb–Douglas preferences are used. Thus, the limited participation model improves the standard model in terms of representing two salient business cycle facts for developing economies by means of a remarkably parsimonious modification, in the absence of shocks to the terms of trade or other types of shocks. Incorporation of the feature of limited participation in the financial markets into a standard model also yields another interesting result. The limited participation model built in this study offers an explanation as to why consumption and output may be highly correlated in some developing countries. Under the limited participation model, high correlation of consumption and GDP emerges naturally, as some of the agents lack access to stock and borrowing markets and consume only out of their labor income. Since these agents are paid by their marginal product, which is directly affected by the aggregate shock, their consumption is highly correlated with the GDP. If the macroeconomy is characterized by severely limited participation in financial markets, then the aggregate consumption and the GDP turn out to be highly correlated as well. As discussed in a previous literature, financial development usually translates into a higher participation in financial markets. Therefore, limited participation model developed in this paper also provides a framework to analyze the effects of financial integration and development from this perspective. I find that financial development and integration and the ensuing greater financial market participation can be associated with higher output and investment volatility. On the other hand, implication of more participation on consumption volatility under the limited participation model is dependent on the choice of a particular risk premium function and its calibration. In particular the consumption volatility goes down after financial integration if the risk premium is a function of a type-specific solvency indicator and goes up when the risk premium is a function of the level of debt. It is an empirical question if the implications of the theoretical model in this paper are plausible. I leave this question for future empirical research.