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The Influence of "Big Brothers:" How Important Are Regional Factors for Uruguay?

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  • Sebastian Sosa
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    Abstract

    This paper examines the role played by regional factors in Uruguay, identifies the sources and transmission mechanisms of shocks stemming from the region, and assesses how vulnerable Uruguay is to a potential crisis in the region. Using a VAR model with block exogeneity restrictions, it finds that shocks from Argentina-which account for about 20 percent of Uruguayan output fluctuations-have large and rapid effects. This is mainly due to the existence of idiosyncratic real and financial linkages between Uruguay and Argentina, which also explain the very high correlation between their business cycles. The analysis of previous crises in the region suggests that despite the importance of these strong linkages, and despite the fact the two deepest crises in recent Uruguayan history followed crises in Argentina, Uruguay is now clearly less vulnerable to financial contagion from the region.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/60.

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    Length: 26
    Date of creation: 01 Mar 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/60

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    Related research

    Keywords: Regional shocks; Banking crisis; Banking systems; Economic growth; Economic models; Spillovers; exchange rate; correlation; correlations; real exchange rate; equations; foreign exchange; covariance; exchange rate depreciations; standard deviation; polynomial; exchange rate policies; equation; cointegration; exchange rate risk; exchange rate depreciation; exchange rates; flexible exchange rate; standard error; real exchange rate depreciation; exchange rate regime; exchange rate policy; real exchange rates; exchange rate devaluation; number of parameters; currency devaluation; covariances; standard deviations; optimization;

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    1. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
    2. Reinhart, Carmen & Calvo, Guillermo & Fernandez Arias, Eduardo & Talvi, Ernesto, 2001. "The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets," MPRA Paper 9075, University Library of Munich, Germany.
    3. Alejandro Izquierdo & Ernesto Talvi & Guillermo A. Calvo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina's Lessons," Research Department Publications 4299, Inter-American Development Bank, Research Department.
    4. Ernesto Talvi & Alfonso S. Bevilaqua & Marcelo Catena, 2001. "Integration, Interdependence, and Regional Goods: An Application to Mercosur," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
    5. Alejandro Izquierdo, 2002. "Sudden Stops, the Real Exchange Rate and Fiscal Sustainability in Argentina," The World Economy, Wiley Blackwell, vol. 25(7), pages 903-923, 07.
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