The contribution of domestic, regional and international factors to Latin America's business cycle

Boschi, Melisso and Girardi, Alessandro (2009): The contribution of domestic, regional and international factors to Latin America's business cycle.

Abstract

This paper quantifies the relative contribution of domestic, regional and international factors to the fluctuation 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, multi- country 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: International business cycle, Latin America, exchange rate regimes, Global VAR methodology, VECM
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Agenor, P. R., C. J. McDermott, and E. S. Prasad (2000) "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts" World Bank Economic Review, 14, 251-285.

Ahmed, S. (2003) "Sources of Economic Fluctuations in Latin America and Implications for Choice of Exchange Rate Regime", Journal of Development Economics, 72, 181-202.

Aiolfi, M., L. Catão, and A. Timmermann (2006) "Common Factors in Latin America's Business Cycles", IMF Working Paper, 06/49.

Artis, M. J. (2003) "Reflections on the Optimal Currency Area (OCA) Criteria in the Light of EMU", International Journal of Finance and Economics, 8, 297-307.

Baltagi, B. H. (2004) "Comment", Journal of Business Economics and Statistics, 2, 163-164.

Banerjee, A., M. Marcellino, and C. Osbat (2004) "Some Cautions on the Use of Panel Methods for Integrated Series of Macro-economic Data", Econometrics Journal, 7, 322-340.

Berg, A., E. Borensztein, and P. Mauro (2002) "An Evaluation of Monetary Policy Regime Options for Latin America", North American Journal of Economics and Finance, 13, 213-235.

Boschi, M. (2007) "Foreign Capital in Latin America: A Long-run Structural Global VAR Perspective", University of Essex, Department of Economics Discussion Paper, n. 647.

Canova, F. (2005) "The Transmission of US Shocks to Latin America2, Journal of Applied Econometrics, 20, 229-251.

Dees, S., F. di Mauro, M. H. Pesaran, and L. V. Smith (2007a) "Exploring the International Linkages of the Euro Area: A Global VAR Analysis", Journal of Applied Econometrics, 22, 1-38.

Dees, S., S. Holly, M. H. Pesaran, and L. V. Smith (2007b) "Long run Macroeconomic Relations in the Global Economy", Economics - The Open-Access, Open-Assessment E-Journal, 2007-3. 21

Edwards, S. (2002) "The Great Exchange Rate Debate after Argentina", North American Journal of Economics and Finance, 13, 237-252.

Girardi, A. and P. Paesani (2008) "The Transfer Problem in the Euro Area: A Cointegration Analysis", Open Economies Review, forthcoming.

HM Treasury (2003) "Analysis of European and UK Business Cycles and Shocks", available at www.hm-trasury.gov.uk.

Ho¤maister, A. W. and J. F. Roldos (1997) "Are Business Cycles Di¤erent in Asia and Latin America?" IMF Working Paper, n. 97/9.

Johansen, S. (1992) "Determination of the Cointegration Rank in the Presence of a Linear Trend", Oxford Bullettin of Economics and Statistics, 54, 383-397.

Koop, G., M. H. Pesaran, and S. M. Potter (1996) "Impulse Response Analysis in Nonlinear Multivariate Models", Journal of Econometrics, 74, 119-147.

Kose, M. A., C. Otrok, and E. Prasad (2008) "Global Business Cycles: Convergence or Decoupling?", IZA Discussion Papers, n. 3442.

Kose, M. A., C. Otrok, and C. Whiteman (2003) "International Business Cycles: World, Region, and Country Speci�c Factors", American Economic Review, 93, 1216-1239.

Lane, P. R. and G. M. Milesi-Ferretti (2004) "The transfer problem revisited: Net foreign assets and real exchange rates", Review of Economics and Statistics, 86, 841-857.

Lanne, M., H. Lütkepohl, and P. Saikkonen (2002) "Comparison of Unit Root Tests for Time Series with Level Shifts", Journal of Time Series Analysis, 23, 667-685.

Lanne, M., H. Lütkepohl, and P. Saikkonen (2003) "Test Procedures for Unit Roots in Time Series with Level Shifts at Unknown Time", Oxford Bulletin of Economics and Statistics, 65, 91-155.

Lütkepohl, H. (2006) New Introduction to Multiple Time Series Analysis, Springer Verlag, Berlin. 22

McKinnon, R. I. (1963) "Optimum Currency Areas", American Economic Review, 53, 717-725.

Mundell, R. A. (1961) "A Theory of Optimum Currency Areas", American Economic Review, 51, 657-665.

Ng, S. and P. Perron (2001) "Lag Lenght Selection and the Construction of Unit Root Tests with Good Size and Power", Econometrica, 69, 1519-1554.

Pesaran, M. H., T. Schuermann, and S. M. Weiner (2004a) "Modelling Regional Interdependencies using a Global Error-Correcting Macroeconometric Model", Journal of Business Economics and Statistics, 2, 126-162.

Pesaran, M. H., T. Schuermann, and S. M. Weiner (2004b) "Rejoinder to Comments on Modelling Re- gional Interdependencies using a Global Error-Correcting Macro-econometric Model", Journal of Business Economics and Statistics, 2, 175-181.

Pesaran, M. H. and Y. Shin (1998) "Generalised Impulse Response Analysis in Linear Multivariate Models", Economics Letters, 58, 17-29.

Saikkonen, P. and H. Lutkepohl (2002) "Testing for a Unit Root in a Time Series with a Level Shift at Unknown Time", Econometric Theory, 18, 313-348.