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Business cycles in emerging markets

Understanding differences in business cycle phenomena between Emerging Market Economies (EMEs) and industrialized countries has been at the center of recent research on macroeconomic fluctuations. We investigate whether these are linked to credit market imperfections. To this end, a small open economy Dynamic Stochastic General Equilibrium (DSGE) framework has been introduced featuring both permanent and transitory productivity shocks, endogenous exchange rate movements, and liability dollarization and valuation effects, thereby accounting for the fact that emerging markets are facing difficulties in borrowing in domestic currency on international capital markets. Businesses can estimate this model using Bayesian techniques for several EMEs, thereby controlling for potential heterogeneity across countries.

The main findings regarding EMEs’ business cycles are (i) despite financial frictions, trend shocks are the main determinant of macroeconomic fluctuations (ii) accounting for liability dollarization ameliorates the model fit (iii) valuation effects on average stabilize changes in the net foreign asset position.

While there are a number of dimensions to sustainability, ranging from the environmental to the social, a common assumption in the literature is that firms from the mature markets are more likely to have the capacity and indeed, rationale to take sustainability more seriously. Emerging market counterparts, MNEs included, are seen to lag behind in sustainable practices. However, recent developments challenge this conventional wisdom. 

Little is known about other factor markets in business groups. Internal labor markets, in particular, can allow business groups to overcome frictions in external labor markets. Reallocating workers through the internal market can be cheaper and more effective than through the external market. It is evident that business groups actively use internal labor markets. We find that, in response to international shocks, there is more labor reallocation between firms in the same group than with unaffiliated firms, and in particular for the case of top workers. 

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