News shocks and business cycle in emerging markets

Abstract

This study examines news shocks in theoretical real-business-cycle model in the aspect of emerging-market economy. Many features in emerging-market business cycles, such as consumption volatility that exceeds income volatility, sudden stop pattern in capital flows and strongly countercyclical current account to income, distinguish itself from a developed small opened economy, and in this study, it also differentiates itself from previous works in the literature by studying in the aspect of business cycles in emerging markets. The study uses simulation method, developing on real-business-cycle theory to generate artificial business cycle moments and impulse response function. For the result, it considers news shocks is one of the candidates to improve real-business-cycle model. Although the business cycle moments still cannot exactly match the real data, there are the signs of improvement in the model from employing the news shocks within the aspect of emerging-market economy. The impulse response function exhibits in line with real data. It can explain the business cycle during crisis with search and matching friction.