International Business Cycles in Emerging Markets

I document cyclical behavior of real exchange rates (RERs) in emerging and developed economies: stronger RER pro-cyclicality coincides with larger relative volatility of consumption and more counter-cyclical trade balance. I then re-evaluate the sources of fluctuations in emerging economies using an international business cycle model estimated to match the behavior of the RERs: interest rate shocks, without any frictions, account for most of output fluctuations. This result is driven by imperfect substitution between domestic and foreign goods, which dampens the impact of trend shocks and accentuates the impact of interest rate shocks on output and consumption