Latin American Performance to External Shocks: What Has Really Been Sweat?

Pagliacci, Carolina (2014): Latin American Performance to External Shocks: What Has Really Been Sweat?

Abstract

How have external shocks affected the LA region? To what extent such shocks relate to US domestic conditions? Has the region engaged in procyclical or countercyclical monetary and fiscal policy in response to external shocks? In this paper we address these questions through an empirical exercise that involves the identification of US domestic structural shocks as LA external shocks, in a two-block model. We find that domestic US fluctuations have a significant impact on commodity prices, and such effect heavily conditions LA capital inflows and LA performance in terms of economic activity, inflation, domestic currency movements, and reserve accumulation. There is no clear evidence that regional fiscal policy has been countercyclical. On the contrary, monetary policy reactions have been visibly countercyclical, driven in part by the impact of capital flows. Capital outflows also seemed to have played an important role in reducing banking currency mismatches in the context of domestic currency depreciations.

• Item Type: MPRA Paper
• Language: English
• Keywords: emerging markets, commodity prices, capital inflows, policy cyclicality
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q0 - General > Q02 - Commodity Markets

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