MA Economics

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Taking a small open real business cycle model to Philippine data
(2016-07) Corpus, John Paul P.; Daway, Sarah Lynne S.
This paper explores the extent to which a calibrated small open economy real business cycle model (SOE-RBC) driven only by productivity shocks can mimic Philippine business cycle data. A statistical analysis of quarterly Philippine data spanning the period 1991–2013 reveals that consumption is smoother than output, and that the trade balance is procyclical, in contrast with the properties of the said variables typically observed in emerging economies. The calibrated model predicts consumption to be less variable than output, as is consistent with the data. However, the model produces a countercyclical trade balance when it is calibrated to match the investment volatility contained in gross capital formation. Procyclicality of the trade balance is only obtained when the model is calibrated to match the investment volatility contained in fixed capital formation and capital adjustment costs are sufficiently high. The model, though, is less successful in mimicking the more granular aspects of business cycle data.