CEPII, Recherche et Expertise sur l'economie mondiale
Trend Shocks and Economic Development

Claude Francis Naoussi
Fabien Tripier

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 Abstract :
This article explores the role of trend shocks in explaining the specificities of business cycles in developing countries using the methodology introduced by Aguiar and Gopinath (2007) [“Emerging Market Business Cycles: The Cycle Is the Trend” Journal of Political Economy 115(1)]. We specify a small open economy model with transitory and trend shocks on productivity to replicate the differences in the business cycle behavior observed between developed, emerging, and Sub-Saharan Africa countries. Our results suggest a strong relationship between the weight of trend shocks in the source of fluctuations and the level of economic development. The weight of trend shocks is (i) higher in Sub-Saharan Africa countries than in emerging and developed countries, (ii) negatively correlated with the level of income, the quality of institutions, and the size of the credit market, and (iii) uncorrelated with the volatility of aid received by countries, the inflation rate, and the trend in trade-openness.

 Keywords : Business Cycle | Permanent shocks | Growth | Africa | Small open economy

 JEL : E32, F41, O55
CEPII Working Paper
N°2013-03, January 2013

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