Real Business Cycles in Emerging Countries? J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe
June, 2009
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Introduction
Motivation ◮ Modeling Emerging Countries: ◮ ◮
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◮
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Non RBC Approach. Strong RBC Approach (e.g. Kydland and Zarazaga, 2002, Kehoe, 2007). Weak RBC Approach (e.g. Aguiar and Gopinath, 2007).
This paper evaluates the first two: How can a simple SOE RBC model driven by permanent and temporary TFP shocks fit the data? Methodological Critique: ◮ ◮
The use of short sample to characterize a unit root. We use more than a century of Argentine and Mexican data (1900-2005).
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Preview of the Results
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The simple RBC model fails to replicate many relevant features of the data: ◮ ◮ ◮ ◮
Autocorrelation of the trade-balance-to-output ratio (TBY). Relative volatility of consumption and output. Volatility of TBY. Autocorrelation of output and investment.
◮
These results are robust to a battery of modifications, both in the model and in the estimation process.
◮
A model that extends the simple RBC to allow for a country premium channel and for a richer set of shocks matches the data much better.
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Road Map
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Business Cycles in Emerging Countries 1900-2005.
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The RBC Model.
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Estimation Procedure.
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Model Performance.
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Extended Model.
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Conclusions.
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Business Cycles in Emerging Countries 1900-2005
GDP per capita U.S. 2
Argentina
Log gdp per capita Cubic trend
Log gdp per capita Cubic trend 1
1.8 1.6
0.8
1.4 1.2
0.6
1 0.8
0.4
0.6 0.4
0.2
0.2 0 1900
1910
1920
1930
1940
1950 year
1960
1970
1980
1990
2000
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
0 1900
1910
1920
1930
1940
1950 year
1960
Real Business Cycles in Emerging Countries?
1970
1980
1990
2000
Business Cycles in Emerging Countries 1900-2005
Developed SOE
Latin America
0.3
0.3
0.2
0.2
0.1
0.1
0
0
−0.1
−0.1
−0.2
−0.2 Australia Austria Belgium Canada Denmark Finland Iceland Netherlands New Zealand Norway Portugal Spain Sweden Switzerland
−0.3 −0.4 −0.5 −0.6 −0.7 −0.8 1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
−0.3 −0.4 Argentina Brazil Chile Colombia Mexico Peru Uruguay Venezuela
−0.5 −0.6 −0.7 −0.8 1900
1910
1920
1930
1940
1950
1960
Series are real GDP per capita as deviations from cubic trend.
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
1970
1980
1990
2000
Business Cycles in Emerging Countries 1900-2005 ACF of TBY Emerging Countries
0.8 Brazil Chile Colombia Ecuador India Korea Malaysia Mexico Paraguay Peru Philippines South Africa Thailand Uruguay Venezuela Argentina mean
0.6
0.4
0.2
0
−0.2
1
1.5
2
2.5 order
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
3
3.5
4
Real Business Cycles in Emerging Countries?
Business Cycles in Emerging Countries 1900-2005
Second Moments: Argentina 1900-2005 Statistic Standard Deviation Correlation with g Y Correlation with tby Serial Correlation
gY 5.3 (0.4) — — — — 0.11 (0.09)
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
gC 7.5 (0.6) 0.72 (0.07) -0.27 (0.07) 0.00 (0.08)
gI 20.0 (1.8) 0.67 (0.09) -0.19 (0.08) 0.32 (0.10)
tby 5.2 (0.5) -0.03 (0.09) — — 0.58 (0.07)
Real Business Cycles in Emerging Countries?
The RBC Model
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Production technology Yt = at Ktα (Xt ht )1−α .
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Temporary shock at , ln at+1 = ρa ln at + ǫat+1 .
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Permanent shock Xt . Let gt ≡
Xt Xt−1 ,
ln(gt+1 /g ) = ρg ln(gt /g ) + ǫgt+1 . ◮
GHH preferences, Capital adjustment costs, Debt-elastic interest rate (closing device).
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Estimation: Argentina 1900-2005
◮
Calibrated Parameters:
Para. Value ◮
γ 2
δ 0.1255
α 0.32
ψ 0.001
ω 1.6
θ 2.24
β 0.9224
d¯ 0.007
g , ρg , σg , ρa , σa , ψ are estimated by GMM (16 moments): ◮ ◮ ◮ ◮
St.Dev. of g Y , g C , g I and tby . 1st and 2nd AC of g Y , g C , g I and tby . Corr. of g C , g I , and tby with g Y . The unconditional mean of g Y .
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Estimation: Argentina 1900-2005
Estimated Structural Parameters Parameter g σg ρg σa ρa φ Overidentifying Restrictions Test
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Point Estimate 1.001 0.030 0.399 0.020 0.006 0.580
Standard Error 0.005 0.004 0.048 0.002 0.076 0.161
p-value
0.069
Real Business Cycles in Emerging Countries?
Emerging Market Fluctuations
Estimated Parameters
Aguiar and Gopinath Introduction
Mexico
Empirical Facts Model Estimation Results Interest Rate Shocks Implications and Conclusion
Parameter σg σz Random Walk Component: Moments used:
Canada
1
2
1
2
2.81 0.48
3.06 0.17
0.88 0.78
1.20 0.69
0.96 σy σc
1.01 σy σNX ,y
0.37 σy σc
0.59 σy σNX ,y
22 / 40
Model Performance ACF of TBY 1
0.8
0.6
0.4
0.2
0
−0.2
−0.4
RBC model data data ± 2std 1
1.5
2
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
2.5 lags
3
3.5
Real Business Cycles in Emerging Countries?
4
Model Performance ACF of TBY 1
0.8
0.6
0.4
0.2
0
Model Model with σ =0
−0.2
g
data data ± 2std −0.4
1
1.5
2
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
2.5 lags
3
3.5
Real Business Cycles in Emerging Countries?
4
Model Performance
Comparing Model and Data: Second Moments Statistic Standard Deviation – Model – Data
gY
gC
gI
tby
6.1 5.3 (0.4) **
4.5 7.5 (0.6) ***
13.5 20.4 (1.8) ***
17.6 5.2 (0.6) ***
0.96 0.72 (0.07)
0.54 0.67 (0.09) **
0.003 -0.04 (0.09)
Correlation with g Y – Model – Data
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Model Performance
Comparing Model and Data: Second Moments Statistic Correlation with tby – Model – Data
Serial Correlation – Model – Data
gY
-0.31 0.11 (0.09) ***
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
gC
gI
-0.03 -0.27 (0.07) **
-0.08 -0.19 (0.08)
-0.17 -0.005 (0.08)
-0.17 0.32 (0.10) ***
tby
0.98 0.58 (0.07) ***
Real Business Cycles in Emerging Countries?
Model Performance
◮
Results are robust to: ◮ ◮ ◮ ◮ ◮ ◮ ◮
Change in Sample: 1880-2005, 1913-2005, 1945-2005. Different moments for GMM. HP filtering. Shares for estimation. Cobb-Douglas. Different values for calibrated parameters. Mexican Data.
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Extended Model
We extend the simple RBC to include: ◮
Empirically plausible interest rate elasticity ψ and interest rate shock µt e ¯ rt = r ∗ + ψ e Dt+1 /Xt −d − 1 + e µt −1 − 1,
◮
Intertemporal preference shock (νt ) and expenditure shock (st ).
◮
The model is estimated with Bayesian techniques, using the same observables, flat priors and measurement errors.
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Extended Model
Para. g σg ρg σa ρa φ σν ρν σs ρs σµ ρν ψ L.Mg.L.
Prior and Posterior Distributions Financial-Friction Model RBC Model Median 5% 95% Median 5% 95 % 1.01 1.003 1.017 1.005 1.001 1.012 0.007 0.0006 0.027 0.03 0.019 0.042 0.35 -0.66 0.83 0.828 0.743 0.919 0.033 0.028 0.038 0.027 0.024 0.032 0.87 0.79 0.93 0.765 0.621 0.888 4.6 3 6.5 3.3 2.3 4.9 0.51 0.37 0.8 0.86 0.74 0.93 0.015 0.001 0.05 0.29 -0.73 0.92 0.056 0.034 0.08 0.91 0.83 0.97 2.8 1.3 4.6 600.59 547.60
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
Extended Model ACF of TBY 1
0.8
0.6
0.4
0.2
0
BC MODEL Financial−Friction Model data data 2−SE band
−0.2
−0.4
1
1.5
2
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
2.5
3
3.5
Real Business Cycles in Emerging Countries?
4
Extended Model
Comparing Model and Data: Second Moments Statistic Standard Deviation – RBC Model – Financial-Friction Model – Data Correlation with g Y – RBC Model – Financial-Friction Model – Data
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
gY
gC
gI
tby
7.2 6.2 5.3 (0.4)
7.7 8.2 7.5 (0.6)
13.0 18.0 20.4 (1.8)
118.0 5.0 5.2 (0.6)
0.88 0.78 0.72 (0.07)
0.77 0.34 0.67 (0.09)
-0.01 -0.024 -0.04 (0.09)
Real Business Cycles in Emerging Countries?
Extended Model
Comparing Model and Data: Second Moments gY
Statistic Correlation with tby – RBC Model – Financial-Friction Model – Data Serial Correlation – RBC Model – Financial-Friction Model – Data
0.29 0.042 0.11 (0.09)
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
gC
gI
-0.02 -0.29 -0.27 (0.07)
-0.03 -0.25 -0.19 (0.08)
0.127 -0.012 -0.005 (0.08)
0.065 -0.086 0.32 (0.10)
tby
0.999 0.53 0.58 (0.07)
Real Business Cycles in Emerging Countries?
Extended Model
Variance Decomposition Shock Nonstationary Tech. Stationary Tech. Preference Country Premium Government Spending
gY 7.4 (11.1) 84.2 (11.1) 5.5 (2.2) 2.9 (0.7) 0.0 (0.0)
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
gC 4.3 (6.9) 51.3 (8.2) 39.1 (5.0) 5.2 (1.8) 0.0 (0.1)
gI 1.5 (2.7) 15.9 (4.1) 20.2 (5.1) 62.4 (5.0) 0.0 (0.0)
tby 0.4 (0.7) 1.3 (0.7) 19.3 (5.9) 78.9 (6.3) 0.1 (0.1)
Real Business Cycles in Emerging Countries?
Conclusions
◮
The simple RBC model fails to replicate many relevant features of the data.
◮
Important Remark: this is a joint test of RBC transmission and TFP shocks. A model that extends the simple RBC to allow for an interest rate channel and for a richer set of shocks match the data satisfactorily.
◮
◮
◮
In this model, the hypothesis “The Cycle is the Trend” is rejected.
We don’t think this alternative model is the most appropriate to describe BC in EC, rather the results hint that exploring different amplification mechanisms is relevant.
J. Garc´ıa-Cicco, R. Pancrazzi and M. Uribe ()
Real Business Cycles in Emerging Countries?
