Real Business Cycles in Emerging Countries? Expanded Version ∗

We investigate the hypothesis that an RBC model driven by nonstationary produc-tivity shocks can explain well observed business-cycle fluctuations in emerging coun-tries. A drawback of existing studies is the use of short samples to identify permanent shifts in productivity. We overcome this difficulty by using more than one century of Argentine and Mexican data to estimate the structural parameters of a small-open-economy RBC model. We find that the RBC model predicts a near random walk be-havior for the trade balance-to-output ratio with a flat autocorrelation function close to unity. By contrast, in the data, the autocorrelation function of the trade balance-to-output ratio is significantly below unity and converges quickly to zero, resembling the one implied by a stationary autoregressive process. In addition, we show that the RBC model fails to capture a number of other important aspects of the emerging-market business cycle, including the excess volatility of consumption. We then show that an estimated augmented model that allow for country-premia and preference shocks and an empirically realistic debt elasticity of the country premium provides a satisfactory account of business cycles in emerging markets and assigns a negligible role to nonsta-tionary productivity shocks. JEL Classification: F41