Domestic, regional, or global shocks? A GVAR analysis of the Latin American business cycle
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PhD Seminar (Econ)
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This study examines the relative importance of domestic, regional, and global shocks on the business cycle of Latin America, comprising six emerging market commodity exporters: Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Employing a Global Vector Autoregressive (GVAR) model and quarterly data over 1999-2021, this paper finds that global shocks are the major source of output fluctuation, falsifying earlier claims that domestic factors have a dominant role. The different outcomes result from the inclusion of China, which explains 20% of Latin America’s output variance. Shocks to global economic activity, liquidity, and commodity prices cumulatively explain 45% of the output variations over a longer forecast horizon. The commodity price shock has a transitory effect on the region’s output but greatly influences its external borrowing costs. Further, a global monetary expansion permanently increases the level of domestic output even when the currencies appreciate.
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