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Equity Returns and Business Cycles in Small Open Economies
Author(s) -
JAHANPARVAR MOHAMMAD R.,
LIU XUAN,
ROTHMAN PHILIP
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12046
Subject(s) - business cycle , economics , volatility (finance) , small open economy , equity (law) , general equilibrium theory , monetary economics , econometrics , financial economics , macroeconomics , monetary policy , political science , law
This is the first paper in the dynamic stochastic general equilibrium literature to match key business cycle moments and long‐run equity returns in a small open economy with production. These results are achieved by introducing four modifications to a standard real business cycle model: (i) borrowing and lending costs are imposed to increase the volatility of the marginal rate of substitution over time, (ii) capital adjustment costs are assumed to make equity returns more volatile, (iii) GHH preferences are employed to smooth consumption, and (iv) a working capital constraint to generate countercyclical trade balances. Our results are based on data from Argentina, Brazil, and Chile.