Stochastic Growth Model and the Role of Shocks to Trend in the MENA Region

This paper investigates the role of shocks to trend in explaining the business cycle fluctuations in MENA countries. Therefore, We estimate a stochastic growth model with both transitory and permanent shocks. Our results provide the evidence about the shocks to trend productivity as a driver of the macroeconomic movements in the region. We find also that the model succeed to match a key of the empirical regularities as for emerging economies, which is the high relative volatility of consumption to output. The examination of the model performance for oil exporting and importing MENA countries indicate that the role of trend is more pronounced for the former group. The examination of the determinants of MENA countries’ volatility identifies the trade openness, volatility of inflation rate, the quality of institution and the volatility of government consumption as source of shocks to productivity.