Publication: Parameter drifts, misspecification and the real exchange rate in emerging countries
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2016-01-01
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Elsevier
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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.
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Emerging economies, Real business cycle, Parameter drift, Real exchange rate, Business cycles, Large devaluations, Rate fluctuations, Models, Policy
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Seoane, H.D. (2016). Parameter drifts, misspecification and the real exchange rate in emerging countries. Journal of International Economics, v. 98, pp. 204-215.