Medium Term Business Cycles in Developing Countries

Executive Summary:

Business cycle fluctuations in developed economies tend to have very strong effects on developing countries, says a new study by Harvard Business School professor Diego Comin, Norman Loayza and Luis Serven of the World Bank, and Farooq Pasha of Boston College. The researchers have developed a quantitative model capable of explaining the amplitude and persistence of the effect that U.S. shocks have on Mexico's macroeconomic variables. The model is then used to provide an account of the drivers of business fluctuations in developing economies. Key concepts include:

• U.S. shocks have a larger effect on Mexico than on the U.S. in terms of GDP.
• The slow diffusion of technologies to Mexico generates a hump-shaped response in Mexican output to U.S. shocks.
• Mexico's consumption is more volatile than its output.
• The model can be a useful starting point for obtaining a better understanding of business cycle fluctuations in developing countries in general, and may be helpful for researchers wishing to introduce other relevant linkages, such as remittances or international capital flows other than FDI.

Paper Information

• Full Working Paper Text
• Working Paper Publication Date: September, 2010
• HBS Working Paper Number: 10-029
• Faculty Unit: Business, Government and International Economy