Working Paper

Time to produce and emerging market crises

Abstract: The opportunity cost of waiting for goods to be produced and sold increases with the cost of financing. This channel is evident in emerging market crises, when industries that use more inventories lose more of their output and lag behind in the recovery. An open economy model with lags in the production process (\"time to produce\") generates comparable cross-sectoral differences in response to a shock to the foreign interest rate and, in the year of the crisis, accounts for up to 25% of the deviation of output from its previous trend. In contrast, an equivalent model without time to produce generates a boom in the year of the crisis and cannot account for the cross-sectoral differences. Likewise, it is impossible to generate the cross-sectoral differences in response to a productivity shock.

Keywords: Emerging markets; Interest rates; Business cycles;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Working Paper

Publication Date: 2010

Number: 10-15