01999cas a2200241 a 4500 AALejournalIMF005009 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451869477 1018-5941 BD-DhAAL BD-DhAAL Guajardo, Jaime. Business Cycles in Small Developed Economies : The Role of Terms of Trade and Foreign Interest Rate Shocks / Jaime Guajardo. Washington, D.C. : International Monetary Fund, 2008. 1 online resource (25 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Empirical evidence for small developed economies finds that consumption is procyclical and as volatile as output, and real net exports are coutercyclical. Earlier studies have not been able to reproduce these regularities in a DSGE small open economy model when productivity shocks drive the business cycles and households have a normal intertemporal elasticity of substitution. Instead, these studies have reduced this elasticity to make consumption more procyclical and volatile and real net exports countercyclical. This paper shows that a standard model can reproduce these regularities, without lowering the intertemporal substitution, if the terms of trade and foreign interest rate are added as source of business cycle fluctuations. These shocks, compared to productivity shocks, make consumption and investment more volatile and procyclical relative to output, and make real net exports countercyclical. Mode of access: Internet IMF Working Papers; Working Paper ; No. 2008/086 Full text available on IMF http://elibrary.imf.org/view/journals/001/2008/086/001.2008.issue-086-en.xml IMF e-Library