توضیح چرخه های کسب و کار در اقتصاد کوچک باز : چقدر قیمت های جهانی مهم است؟

This paper analyzes the role of world price shocks – fluctuations in the prices of capital, intermediate, and primary goods, and in the world real interest rate – in the generation and propagation of business cycles in small open developing countries. I construct a stochastic dynamic multi-sector small open economy model. The model is a variant of the specific-factors model and reflects the major structural characteristics of developing economies. I utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks. The results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries.

Small open developing countries differ from developed economies along several dimensions. They rely heavily on a narrow range of primary commodities for their export earnings. These earnings are highly unstable due to recurrent and sharp fluctuations in the relative prices of primary commodities. Moreover, a significant fraction of their export revenues is used to pay back their large foreign debt. Developing countries also depend heavily on imported capital goods and intermediate inputs for domestic production. In light of these structural features, it is not difficult to see that fluctuations in world prices – fluctuations in the prices of primary, capital, and intermediate goods, and in the world real interest rate – could have an important impact on business cycle fluctuations in small open developing countries.1 The objective of this paper is to examine the role of world prices in inducing business cycle fluctuations in these countries using a stochastic dynamic business cycle model. The model embodies the main structural characteristics of small open developing economies. In particular, the model provides an environment in which the dynamic interactions between world price shocks and business cycle fluctuations in traded and non-traded goods sectors, and several factors of production including imported capital goods, imported intermediate inputs, non-tradable and inelastically supplied capital (land), and labor can be studied. I also examine impulse responses to investigate the propagation of economic fluctuations generated by world price shocks and domestic productivity shocks. This paper is closely related to some of the recent literature that studies the importance of these price fluctuations.2Mendoza (1995) was the first paper to analyze the quantitative importance of terms of trade shocks in driving business cycles using a dynamic stochastic small open economy model. In Mendoza’s model domestically produced capital goods in the non-tradable goods sector are inelastically supplied, and capital is perfectly substitutable between exportable and importable goods producing sectors. Also, terms of trade shocks do not have a direct impact on the dynamics of the non-traded sector in his model, because the only endogenous factor in that sector is domestic labor. His paper focuses only on aggregate output fluctuations and he finds that terms of trade disturbances explain 56% of output variation. This paper extends Mendoza’s work by developing a richer production structure that captures several empirically relevant features of developing economies. In particular, I consider a variant of the specific factors model with two sectors: production of exportable primary goods features diminishing returns as these goods are produced with imported capital, domestic labor, and inelastically supplied land. The non-traded final goods sector employs capital, imported intermediate inputs, and domestic labor. This production structure, while capturing the important role played by land in the production process, limits the substitution effects across different types of factors, and reduces the volatility of primary sector output. This, in turn, decreases the volatility of aggregate output, and helps the model to generate realistic volatility properties. My model also differentiates between domestically produced capital goods, imported capital goods, and imported intermediate inputs as factors of production. My empirical methodology utilizes the solution of the model and variance decomposition methods to examine the importance of different types of shocks in driving macroeconomic fluctuations. In particular, I determine the contribution of each shock to business cycle fluctuations by decomposing the variances of several variables into the proportions that are explained by world price shocks and domestic productivity disturbances. This methodology also allows me to study the relationship between the propagation of business cycles in different sectors and fluctuations in the relative prices of different types of imported factors as the model includes shocks to relative prices of imported capital goods and intermediate inputs.3 I find that world price shocks play an important role in driving business cycles in small open developing economies: roughly 88% of aggregate output fluctuations can be explained by world price shocks. These shocks are able to account for 90% of investment variation. Moreover, world price shocks, with their significant impact on factors of production, such as capital goods and intermediate inputs, are able to explain the majority of the other variables’ fluctuations. There are three major reasons why world price shocks play a larger role in explaining business cycle fluctuations in my study than Mendoza (1995): first, these shocks directly affect both primary goods and non-traded final goods sectors because both of these sectors employ imported factors of production in my model. Second, a significant fraction of capital goods and all intermediate inputs are imported in the model. Third, relative price shocks are more volatile than terms of trade and productivity shocks. Mendoza (1991) constructs a small open economy model calibrated for Canadian economy and studies the role of productivity and world real interest rate shocks. He finds that world interest rate shocks have only a minor impact on cyclical fluctuations. More recent studies (see Correia et al., 1995; Schmitt-Grohe, 1998) also deliver this result. However, Mendoza (1991) conjectures that interest rate disturbances might cause significant business cycle fluctuations in highly indebted developing countries. I consider the importance of world real interest rate shocks in a model calibrated for a typical developing economy. My results verify Mendoza’s conjecture and establish an intuitively appealing empirical link between the magnitude of foreign interest payments and the importance of world real interest rate shocks. As the ratio of foreign interest payments to output increases, world real interest rate shocks generate much stronger income and substitution effects and explain a larger fraction of output fluctuations. This paper is also related to Kouparitsas (1997a). His paper investigates the transmission of business cycles from developed Northern countries to developing Southern economies in a two-country model. His results suggest that almost 20% of output variation in developing Southern countries is explained by productivity shocks in developed Northern countries. I present results which indicate that world price shocks play a much more important role in accounting for macroeconomic variation in developing countries than Northern productivity shocks in the Kouparitsas’ model. This suggests that it is not possible to explain all world price fluctuations by productivity shocks in developed economies. Sensitivity analysis suggests that the presence of two production sectors with land as a fixed factor, and the coexistence of world price and domestic productivity shocks substantially strengthen the ability of the model to match business cycle properties of developing economies. Impulse responses show the typical propagation mechanism of adverse price shocks observed in several developing countries: following a fall in the relative price of exports, which causes a substantial decline in the imports of productive inputs, the export sector contracts. This then decreases domestic consumption and investment. The organization of the paper is as follows: in Section 2, I review the structural characteristics of developing countries, present the details of the model, and its calibration. I assess the ability of the model in replicating certain features of business cycles in developing countries in Section 3. In Section 4, I employ variance decompositions to evaluate the importance of different types of shocks in generating business cycles. This section also presents impulse responses and sensitivity analysis. Section 5 concludes

I examine the effects of world price shocks on business cycles in small open developing countries using a dynamic stochastic multi-sector small open economy model. My model economy is a variant of the specific factors model and embodies several empirically relevant characteristics of developing countries. I employ variance decompositions on the solution of the model to quantify the contribution of world price shocks to business cycle fluctuations. My estimations suggest that world price shocks have a significant role in driving business cycles in developing economies. The model is also able to replicate volatility and comovement properties of sectoral outputs in small open developing economies. My study assumes that world price shocks are exogenous. Considering the significant role played by these shocks, it is important to examine what types of forces drive these price fluctuations. This can provide a better understanding of the sources of business cycles in small open developing countries. Understanding the transmission and propagation of world price fluctuations is also crucial in the design and conduct of macroeconomic policies. These issues have received widespread attention by policy makers, since several developing economies have recently faced highly volatile prices in their export and import markets. In particular, analysis of the implications of government policies aiming to stabilize business cycles induced by world price fluctuations, which have not been explored in a dynamic stochastic setting yet, seems to be another fruitful research avenue.