Sectoral Asymmetries in a Small Open Economy

Sectoral Asymmetries in a Small Open Economy

Title:

Sectoral Asymmetries in a Small Open Economy

Number:

14/33

Author(s):

S. Tolga Tiryaki

Language:

English

Date:

September 2014

Abstract:

This paper explores the sectoral dimension of emerging market business cycles by building a two-sector small open economy real business cycle model featuring a working capital requirement, variable capital utilization and imported inputs in production. The primary finding is that the price of imported inputs and nontradable sector productivity are the two most important sources of macroeconomic fluctuations in a typical emerging market economy. Interest rates and the price of imported final goods also play significant role in driving investment and import fluctuations. The model also produces significant sectoral asymmetry, especially in response to interest rate shocks. Variable capital utilization acts as a strong propagation mechanism.

Keywords:

Business cycles, Emerging markets, Imported inputs, Capital utilization

JEL Codes:

E32; F32

Sectoral Asymmetries in a Small Open Economy
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