Interest Rates and Business Cycles in Emerging Economies: The Role of Financial Frictions

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. This paper embeds a financial contract à la Bernanke et al. (1999) in a standard small open economy business cycle model that endogenously delivers countercyclical interest rates. The model is then applied to the data, drawn from a novel panel dataset for emerging economies that includes financial data, namely sovereign and corporate interest rates as well as leverage. It is shown 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.

Bibliographic Details

Main Author:	Inter-American Development Bank
Other Authors:	Andrés Fernández Martín
Format:	Working Papers biblioteca
Language:	English
Published:	Inter-American Development Bank
Subjects:	Financial Sector, Production and Business Cycle, Monetary Policy, Financial Crisis and Structural Adjustement, Integration and Trade, E32 - Business Fluctuations • Cycles, E44 - Financial Markets and the Macroeconomy, F41 - Open Economy Macroeconomics, Business cycle models, Emerging economies, Financial frictions,
Online Access:	http://dx.doi.org/10.18235/0011424 https://publications.iadb.org/en/interest-rates-and-business-cycles-emerging-economies-role-financial-frictions
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