Emerging Economy Business Cycles: Financial Integration and Terms of Trade Shocks

This paper analyses the extent to which financial integration impacts the manner in which terms of trade affect business cycles in emerging economies. Using a small open economy model, it demonstrates that as capital account openness increases in an economy that faces trade shocks, business cycle volatility reduces. The paper further finds that for an economy with limited financial openness, and a relatively open trade account, a model with exogenous terms of trade shocks is able to replicate the features of the business cycle.