Equity Returns and Business Cycles in Small Open Economies

2013/08/15 by MOHAMMAD R. JAHAN‐PARVAR, Mohammad R. Jahan‐Parvar, Xuan Liu +3
Economics, Econometrics and Finance · #Economic theories and models #Monetary Policy and Economic Impact #Economic Theory and Policy

paper · pdf · doi:10.1111/jmcb.12046

Abstract

This is the first paper in the dynamic stochastic general equilibrium literature to match key business cycle moments and long‐run equity returns in a small open economy with production. These results are achieved by introducing four modifications to a standard real business cycle model: (i) borrowing and lending costs are imposed to increase the volatility of the marginal rate of substitution over time, (ii) capital adjustment costs are assumed to make equity returns more volatile, (iii) GHH preferences are employed to smooth consumption, and (iv) a working capital constraint to generate countercyclical trade balances. Our results are based on data from Argentina, Brazil, and Chile.

Citations

• Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis
• Fiscal shocks and their consequences
• Postwar U.S. Business Cycles: An Empirical Investigation
• Time to Build and Aggregate Fluctuations
• Country spreads and emerging countries: Who drives whom?
• Credit Cycles

Related

• The World Is Not Enough! Small Open Economies and Regional Dependence
• Capital Demand Driven Business Cycles: Mechanism and Effects
• Capital Inequality Induced Business Cycles
• Complex economics of simple periodic systems
• Growth cycles in mature and dual economies