Are Business Cycles Different in Asia and Latin America?

Understanding business cycles is the first step in designing appropriate stabilization policies . Although there is no a priori reason to think that business cycles are different in industrialized and developing countries, the faster growth and greater volatility in developing countries, combined with the recent emphasis in the literature on the connection between trends and cycles, suggests that there could be some interesting differences. This paper compares the properties of the business cycles in Asia and in Latin America using a structural vector autoregression approach that encompasses equilibrium and disequilibrium views of the business cycle. The paper thus seeks to further our understanding of the relative importance of the different factors or shocks that drive business fluctuations in the developing countries. The methodology used allows the documentation of the dynamic impact of these shocks on key macroeconomic variables (output, real exchange rate, trade balance, and prices) in a framework that simultaneously considers shocks emanating from the global environment (world interest rates and terms of trade) and shocks of domestic origin (supply, fiscal, and nominal). The evidence for the developing countries in Asia and in Latin America suggests that, as in many industrialized countries, (i) the main source of output fluctuations are supply shocks, even in the short run; (ii) real exchange rates are mostly driven by fiscal shocks; and (iii) terms of trade shocks appear to play a small role in output and real exchange rate fluctuations but are important determinants of the trade balance. The paper also suggests that developing countries in these two regions differ: in Latin America, external shocks--in particular, world interest rate shocks--and demand shocks affect output fluctuations more than in Asia. Nominal shocks appear to affect these developing countries dfferently but in general play a small role in GDP and real exchange rate fluctuations.