Heterogenous productivities and interest rate shocks: a two sector model for Argentina

Abstract

Understanding economic cycles has been one of the most challenging items in the macroeconomist research agenda for decades. This study aims to build a dynamic stochastic general equilibrium model capable of reproducing the empirical regular- ities of economic cycles in Argentina. Two main features are highlighted. First, the recognition of heterogenous productivity levels across the country´ s produc- tive sectors, captured by a tradable sector and a non tradable sector. Second, the importance of shocks to international interest rates in explaining numerous episodes of recessions in the country economic history. In addition, local interest rates are impacted by the country risk premium, which in turn is elastic to the expected total factor productivity of the tradable sector. Such elasticity is found to be key for the potential of the model to satisfactorily explain business cycles in Argentina.