Investment Specific Technology Shocks and Emerging Market Business Cycle Dynamics

This article explores the role of investment specific technology shocks for emerging market business cycle fluctuations. The analysis is motivated by two key empirical facts; the presence of investment specific technical change in the post-war US economy together with the importance of investment goods for the emerging market imports. The goal of this paper is to quantify the contribution of the investment specific technical change in the US for the business cycles of an emerging country in the context of a two country, two sector international real business cycle framework with investment and consumption goods sectors. We estimate the model for Mexico and US data and find that a permanent US originating investment specific technology shock is very important in explaining the Mexican output and investment dynamics. This shock explains around 80% of the investment variability and it accounts for the around 45% of the output variability. We argue that the model's ability to account for the important business cycle features of the data is dependent on the presence of shocks that capture financial frictions as well as a permanent investment specific technology shock that originates in the US