Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions
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Abstract
Countercyclical country interest rates have been shown to be an important characteristic of business cycles in emerging markets. In this paper we provide a microfounded rationale for this pattern by linking interest rate spreads to the dynamics of corporate leverage. For this purpose we embed a financial accelerator into a business cycle model of a small open economy and estimate it on a novel panel dataset for emerging economies that merges macroeconomic and financial data. The model accounts well for the empirically observed countercyclicality of interest rates and leverage, as well as for other stylized facts. (JEL E13, E32, E43, E44, F41, O11)Citation
Fernández, Andrés, and Adam Gulan. 2015. "Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions." American Economic Journal: Macroeconomics, 7 (3): 153-88. DOI: 10.1257/mac.20120141Additional Materials
JEL Classification
- E13 General Aggregative Models: Neoclassical
- E32 Business Fluctuations; Cycles
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- F41 Open Economy Macroeconomics
- O11 Macroeconomic Analyses of Economic Development
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