Zhao, Yan (2011): Borrowing constraints and the trade balance-output comovement.
Download (224kB) | Preview
The countercyclical trade balance ratio is one of the key stylized facts for open economies. The magnitude differs from country to country. Specifically, the trade balance ratio is more negatively correlated with output in emerging economies than in developed economies, suggesting that the trade balance is more sensitive to output changes in the former group. This paper explores whether this difference is caused by international borrowing constraints imposed on emerging economies.
By modeling the borrowing constraints as conditional on macroeconomic performance, the paper shows that when a positive shock takes place in emerging economies, $GDP$ increases and the borrowing constraint becomes less binding, which results in less incentive to accumulate foreign assets. When a negative shock is present, in contrast, $GDP$ decreases, and the representative household has to increase the trade balance to avoid the possibly binding borrowing constraints.
|Item Type:||MPRA Paper|
|Original Title:||Borrowing constraints and the trade balance-output comovement|
|Keywords:||borrowing constraint; trade balance-output comovement|
|Subjects:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation: Models and Applications
|Depositing User:||Yan Zhao|
|Date Deposited:||25 Feb 2012 15:40|
|Last Modified:||11 Mar 2017 16:37|
Aghiona, P., Bacchetta, P., and Banerjeef, A. (2001). Currency crises and monetary policy in an economy with credit constraints. European Economic Review, 45(7):1121–1150.
Aguiar, M. and Gopinath, G. (2007). Emerging market business cycles: The cycle is the trend. The Journal of Political Economy, 115(1):69–102.
Arellano, C. and Mendoza, E. G. (2002). Credit frictions and sudden stops in small open economies: an equilibrium business cycle framework for emerging makets crisis. NBER Working Paper.
Backus, D. K., Kehoe, P. J., and Kydland, F. E. (1992). International real business cycles. The Journal of Political Economy, 100:745–775.
Benigno, G., Chen, H., Otrok, C., Rebucci, A., and Young, E. R. (2010). Revisiting overborrowing and its policy implications. Central Bank of Chile Working Paper.
Blankenau,W., Ayhan Kose, M., and Yi, K.-M. (2001). Can world real interest rates explain business cycles in a small open economy? Journal of Economic Dynamics and Control, 25:867–889.
Caballero, R. J. and Krishnamurthy, A. (2001). International and domestic collateral constraints in a model of emerging market crises. Journal of Monetary Economics, 48:513– 548.
Colea, H. L. and Kehoe, T. J. (1996). A self-fulfilling model of mexico’s 1994-1995 debt crisis. Journal of International Economics, 41:309–330.
Correia, I., Neves, J. C., and Rebelo, S. (1995). Business cycles in a small open economy. European Economic Review, 39:1089–1114.
Durdua, C. B., Mendozab, E. G., and Terronesd, M. E. (2009). Precautionary demand for foreign assets in sudden stop economies: An assessment of the new mercantilism. Journal of Development Economics, 89:194–209. 25
Eaton, J. and Gersovitz, M. (1981). Debt with potential repudiation: Theoretical and empirical analysis. Review of Economic Studies, 48(2):289–309.
Galindev, R. and Lkhagvasuren, D. (2010). Discretization of highly persistent correlated ar(1) shocks. Journal of Economic Dynamics and Control, 34:1260–1276.
Garcia-Cicco, J., Pancrazi, R., and Uribe, M. (2010). Real business cycles in emerging countries. The American Economic Review, 100:2510–2531.
Gelos, R. G. (2003). Foreign currency debt in emerging markets: firm-level evidence from mexico. Economics Letters, 78(3):323–327.
Gomme, P. and Rupert, P. (2007). Theory,measurement and calibration of macroeconomic models. Journal of Monetary Economics, 54:460–497.
Greenwood, J., Hercowitz, Z., and Huffman, G. W. (1988). Investment, capacity utilization, and the real business cycle. American Economic Review, 78:402–417.
Gregorio, J. D. (1996). Borrowing constraints, human capital accumulation, and growth. Journal of Monetary Economics, 37:49–71.
Letendre, M.-A. (2004). Capital utilization and habit formation in a small open economy model. The Canadian Journal of Economics, 37:721–741.
Mendoza, E. G. (1991). Real business cycles in a small open economy. The American Economic Review, 81:797–818.
Mendoza, E. G. (2001). Credit, prices, and crashes: Business cycles with a sudden stop. NBER Working Paper.
Nason, J. M. and Rogers, J. H. (2006). The present-value model of the current account has been rejected: Round up the usual suspects. Journal of International Economics, 68:159–187.
Schmitt-Grohe, S. and Uribe, M. (2003). Closing small open economy models. Journal of International Economics, 61:163–185.