A central characteristic of business cycles in developed countries is their remarkable dampening after the second world war. This phenomenon is often attributed to improved policy management. Policy makers and policy institutions are generally credited for avoiding large economic depressions like the one that took place in the interwar period. By contrast, business cycles in many emerging countries display no signs of moderation in the past fifty years.
Large swings in aggregate activity areas likely to occur now as they were a century ago. For instance, following the debt crisis of the 1980smost countries in Latin America underwent output contractions of enormous dimensions, in many cases comparable to the one that took place during the U.S. Great Depression. Not surprisingly, misplaced government policies and widespread market imperfections have been blamed for the failure to achieve and maintain aggregate stability in the region.
Recently, a number of studies have departed from the mainstream view that in order to understand economic fluctuations in emerging markets, theoretical models must take explicitly into account the role of policy and market failures. This line of research argues that business cycles in emerging countries can be explained well using an undistorted neoclassical model driven solely by shocks to total factor productivity. Kydlandand Zarazaga (2002), for instance, adopt a strong view by arguing that the RBC model can replicate satisfactorily the lost decade of the 1980s in Argentina.
More recently Aguiarand Gopinath (2007) have suggested that an RBC model driven by permanent and transitory shocks to productivity can explain well business cycles in developing countries. These authors acknowledge the fact that shocks impinging upon emerging countries are numerous and of dierentnatures, but argue that their combined eectcan be satisfactorily modeled as an aggregate shock to total factor productivity. In addition, they argue that the neoclassical model is an adequate framework for understanding the transmission of such shocks.
