Leadership

Medium Term Business Cycles In Developing Countries

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Executive Summary

They build a two country asymmetric DSGE model with two features: endogenous and slow diffusion of technologies from the developed to the developing country, and adjustment costs to investment flows. The authors calibrate the model to match the Mexico-U.S. trade and FDI flows. The model is able to explain the following stylized facts: U.S. and Mexican output co-move more than consumption; U.S. shocks have a larger effect on Mexico than in the U.S.; U.S. business cycles lead over medium term fluctuations in Mexico; Mexican consumption is more volatile than output.

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