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Effects of external shocks on macroeconomic fluctuations in Pacific Alliance countries

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  • Rodríguez, Gabriel
  • Vassallo, Renato
  • Castillo B., Paul

Abstract

Given Pacific Alliance (PA) countries’ dependence on the external sector amidst volatile global financial conditions and increased trade openness, it is important to understand the time-varying impact of external shocks on these economies to assess their resilience. We use data for 1994Q1-2019Q4 and VAR models with time-varying parameters and stochastic volatility to study the heterogeneity of responses to financial, real, and nominal external shocks. The results suggest that external shocks have played a significant role in domestic cycles (50% on average), but their impact became temporarily larger during the global low-interest-rate period; i.e., the impact of export price and Fed rate shocks on GDP increased the most, peaking in 2002–2011, whereas the effect of shocks originating in China, although the largest, remained stable. In addition, a more predictable and countercyclical monetary policy in response to commodity price shocks diminished the transmission of external shocks, thereby increasing PA economies’ external resilience.

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  • Rodríguez, Gabriel & Vassallo, Renato & Castillo B., Paul, 2023. "Effects of external shocks on macroeconomic fluctuations in Pacific Alliance countries," Economic Modelling, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:ecmode:v:124:y:2023:i:c:s0264999323001141
    DOI: 10.1016/j.econmod.2023.106302
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    More about this item

    Keywords

    Macroeconomic fluctuations; External shocks; Autoregressive vectors with time-varying parameters; Stochastic volatility; Bayesian estimation and comparison; Pacific Alliance countries;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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