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The Effect of External Conditionson Growth in Latin America

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  • Jeromin Zettelmeyer
  • Pär Österholm

Abstract

This paper investigates the sensitivity of Latin American GDP growth to external developments using a Bayesian VAR model with informative steady-state priors. The model is estimated on quarterly data from 1994 to 2006 on key external and Latin American variables. It finds that 50 to 60 percent of the variation in Latin American GDP growth is accounted for by external shocks. Conditional forecasts for a variety of external scenarios suggest that Latin American growth is robust to moderate declines in commodity prices and U.S. or world growth, but sensitive to more extreme shocks, particularly a combined external slowdown and tightening of world financial conditions.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/176.

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Length: 36
Date of creation: 01 Jul 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/176

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Keywords: Commodity prices; Latin America; Economic growth; world growth; bond; bond spread; high yield bond; external shocks; corporate bond; market bond; emerging market bond; high-yield corporate bond; bond index; high-yield bond; dynamic impact; external financing; aggregate demand; financial systems; trading partners; world economy; bond markets; bond spreads; import demand; open economy; terms of trade; futures prices; export prices; financial assets; current account surplus; trade share;

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References

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  1. Norman Loayza & Pablo Fajnzylber & César Calderón, 2004. "Economic Growth in Latin America and The Caribbean: Stylized Facts, Explanations, and Forecasts," Working Papers Central Bank of Chile 265, Central Bank of Chile.
  2. Athanasios Orphanides & Simon Van_Norden, 2000. "The Reliability of Output Gap Estimates in Real Time," Econometric Society World Congress 2000 Contributed Papers 0768, Econometric Society.
  3. Jeromin Zettelmeyer, 2006. "Growth and Reforms in Latin America," IMF Working Papers 06/210, International Monetary Fund.
  4. Alejandro Gaytán González & Jesús R. González García, 2006. "Structural Changes in the Transmission Mechanism of Monetary Policy in Mexico: A Non-linear VAR Approach," Working Papers 2006-06, Banco de México.
  5. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
  6. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
  7. Villani, Mattias, 2005. "Inference in Vector Autoregressive Models with an Informative Prior on the Steady State," Working Paper Series 181, Sveriges Riksbank (Central Bank of Sweden).
  8. Stark, Tom & Croushore, Dean, 2002. "Forecasting with a real-time data set for macroeconomists," Journal of Macroeconomics, Elsevier, vol. 24(4), pages 507-531, December.
  9. Kose, M. Ayhan & Rebucci, Alessandro, 2005. "How might CAFTA change macroeconomic fluctuations in Central America?: Lessons from NAFTA," Journal of Asian Economics, Elsevier, vol. 16(1), pages 77-104, February.
  10. Pär Österholm, 2006. "Incorporating judgement in fan charts," Finance and Economics Discussion Series 2006-39, Board of Governors of the Federal Reserve System (U.S.).
  11. Lars E.O. Svensson, 2005. "Monetary Policy with Judgment: Forecast Targeting," NBER Working Papers 11167, National Bureau of Economic Research, Inc.
  12. Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
  13. Adolfson, Malin & Andersson, Michael K. & Lindé, Jesper & Villani, Mattias & Vredin, Anders, 2005. "Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks," Working Paper Series 188, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006.
  14. Christopher A. Sims, 1982. "Policy Analysis with Econometric Models," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(1), pages 107-164.
  15. McNees, Stephen K., 1990. "The role of judgment in macroeconomic forecasting accuracy," International Journal of Forecasting, Elsevier, vol. 6(3), pages 287-299, October.
  16. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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