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Title: Business cycles in a credit constrained small open economy
Author: Buainain Sarquis, Sarquis José
Awarding Body: London School of Economics and Political Science (University of London)
Current Institution: London School of Economics and Political Science (University of London)
Date of Award: 2009
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This thesis addresses the sources and propagation mechanisms of business cycles in small open emerging economies. Vector autoregressive analyses (Chapter 1) of Brazil - whose regularities are common to other emerging economies - show that exogenous global credit disturbances affecting international liquidity, uncertainty and risk appetite account for over 40% of output variability. These disturbances explain the bulk of emerging economies' excess macroeconomic volatility. They transmit via credit frictions, mainly as shocks to the real interest rates that emerging economies face in international markets. They comprise about 60% of the country spread variations. Responses of output and other real aggregates to credit shocks reveal growth persistence, hump-shaped recession and recovery patterns. These regularities are examined within proposed dynamic stochastic general equilibrium models of a small open economy with permanently binding endogenous constraint on foreign credit. When accumulating capital works as collateral in the constraint, the model (Chapter 2) exhibits unprecedented intertemporal propagation, mainly through wedges between consumption's marginal rate of substitution and the return on capital. Interest rate shocks have significant persistent effects which mitigate the dominance of uncorrelated productivity shocks. The model nests properties of real business cycle models and overcomes typical anomalies of small open economy models which are derived from weak consumption substitution effects. A second model (Chapter 3) tackles the macroeconomic implications of country spread as an endogenous state variable affecting credit and business cycles. The spread is built into an endogenous credit constraint, similar to an external financial premium. Amplification and propagation mechanisms are further enhanced through an enriched intertemporal wedge. Independent US real interest rate and exogenous country spread shocks - representing exogenous credit disturbances to emerging economies - are equally important over business cycle horizons. Calibrated for Brazil, both models match qualitative and quantitative regularities empirically observed in response dynamics, second moments and variance decompositions.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available