Parameter drifts, misspecification and the real exchange rate in emerging countries Articles uri icon

publication date

  • January 2016

start page

  • 204

end page

  • 215

volume

  • 98

International Standard Serial Number (ISSN)

  • 0022-1996

Electronic International Standard Serial Number (EISSN)

  • 1873-0353

abstract

  • This paper reviews the baseline framework for the analysis of emerging economies. Using Argentinean data, I estimate a small open economy model with stochastic trend, working capital constraint and augmented with time-varying parameters. I find that "structural" technological and financial parameters of one-sector model are time-varying during 1936-2006. Time-varying parameters correlate with the real exchange rate, suggesting potential misspecification of the one-sector model. Therefore, I propose a two-sector model that endogenously accounts for the real exchange rate. In this model, stationary productivity shocks and the country premium together explain a large share of the variability observed in the data. (C) 2015 Elsevier B.V. All rights reserved.

keywords

  • emerging economies; real business cycle; parameter drift; real exchange rate; business cycles; large devaluations; rate fluctuations; models; policy