The Contribution of Domestic, Regional and International Factors to Latin America's Business Cycle

Abstract

This paper quanti…es the relative contribution of domestic, regional and international factors to the ‡uctuation of domestic output in six key Latin American (LA) countries: Argentina, Bolivia, Brazil, Chile, Mexico and Peru. Using quarterly data over the period 1980:1-2003:4, a multi-variate, multicountry time series model was estimated to study the economic interdependence among LA countries and, in addition, between each of them and the three world largest industrial economies: the US, the Euro Area and Japan. Falsifying a common suspicion, it is shown that the proportion of LA countries' domestic output variability explained by industrial countries' factors is modest. By contrast, domestic and regional factors account for the main share of output variability at all simulation horizons. The implications for the choice of the exchange rate regime are also discussed.

Business cycles, international trade and capital flows: evidence from Latin America

“…Concerning regional factors (graph II in Panels A-F), there is evidence of a sizeable regional business cycle component in the LA countries, as also found by Aiolfi et al (2010) and Boschi and Girardi (2011), among others. Averaging over all simulation steps and rolling estimates, regional factors account from about 20 (in the case of Chile) to 40 per cent (for Venezuela) of output growth variability.…”

“…Therefore, we include the US as the main driving force behind business cycles comovements in the LA region (see the literature on the US "backyard", e.g. Ahmed 2003;Canova 2005;Caporale et al 2011), but also the Euro area because of its historical trade linkages with the LA region, as well as Japan (given the financial linkages documented by Boschi 2012;Boschi and Girardi 2011) and China, whose trade linkages with the LA region have become much stronger in recent years (Cesa-Bianchi et al 2011).…”

“…Even advanced econometric approaches, such as the Global VAR (see Cesa-Bianchi et al 2011;Boschi and Girardi 2011) or dynamic factor models (as in Kose et al 2012, among others), would not be a fully satisfactory modelling strategy since they belong to the class of (linear) time-invariant models.…”

“…Other economies of the LA region (such as Colombia or Bolivia) are not included in the analysis because of the lack of data on GDP for the eighties. The same choice was made by Boschi and Girardi (2011) and Caporale et al (2011), among others. 7 These results are not reported to save space.…”

Fiscal spillovers in the Euro area

“…0 i  is the reference country (Germany). The GVAR approach is applied here to investigate cross-country linkages within the EMU region, although it would clearly be of interest also to model the global linkages between the euro area and other economies (as in Dees et al, 2007, andBoschi andGirardi, 2011, among others (Bandholz et al, 2009;Chinn and Frankel, 2007;Paesani et al, 2006) and are consistent with a theoretical framework based on the loanable funds approach to the determination of interest rates. The inclusion of the Euribor rate as a global variable aims at capturing the common monetary policy shared by the EMU countries.…”