The price of imported capital and consumption fluctuations in emerging economies

Abstract

We study the role played by fluctuations in the price of imported capital in determining the behavior of consumption fluctuations in developing countries. For this, we decompose the price of imported capital into common and country-specific components, where the common component is the price of capital in the US. Empirically, we document that, in contrast to small industrialized countries, consumption in developing countries responds more than output to unexpected changes in the price of capital in the US. As such, fluctuations in the price of capital in the US contribute to a high volatility of consumption relative to that of output in developing countries. We then show that a small open-economy real business cycle model driven by fluctuations in the price of imported capital can account for the responses of consumption and output to innovations of the price of capital in the US and for the high relative volatility of consumption observed in developing country. Finally, confronting the model to the data, we further find that fluctuations in the price of capital in the US contribute substantially to fluctuations of consumption in countries that display a low volatility of output and a large relative volatility of consumption.