Business cycles in a small open Brazilian economy

Abstract

We develop a dynamic general equilibrium model for a small open economy to investigatewhich combinations of preferences and distortions better replicate the Brazilian business cycles. We find that the preferences proposed by Greenwood, Hercowitz and Huffman (1988) in association with capital adjustment costs generate simulated data consistent with the cyclical volatilities of the national income accounts identity as well as with the countercyclical nature ofthe trade balance. The standard (Hansen, 1985) preferences and foreign capital markets transaction costs are, in contrast, largely inconsistent with many data properties.