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China's Emergence in the World Economy and Business Cycles in Latin America

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Author Info

  • Cesa-Bianchi, Ambrogio

    ()
    (Inter-American Development Bank)

  • Pesaran, M. Hashem

    ()
    (University of Cambridge)

  • Rebucci, Alessandro

    (Inter-American Development Bank)

  • Xu, TengTeng

    (Bank of Canada)

Abstract

The international business cycle is very important for Latin America’s economic performance as the recent global crisis vividly illustrated. This paper investigates how changes in trade linkages between China, Latin America, and the rest of the world have altered the transmission mechanism of international business cycles to Latin America. Evidence based on a Global Vector Autoregressive (GVAR) model for 5 large Latin American economies and all major advanced and emerging economies of the world shows that the long-term impact of a China GDP shock on the typical Latin American economy has increased by three times since mid-1990s. At the same time, the long-term impact of a US GDP shock has halved, while the transmission of shocks to Latin America and the rest of emerging Asia (excluding China and India) GDP has not undergone any significant change. Contrary to common wisdom, we find that these changes owe more to the changed impact of China on Latin America’s traditional and largest trading partners than to increased direct bilateral trade linkages boosted by the decade long commodity price boom. These findings help to explain why Latin America did so well during the global crisis, but point to the risks associated with a deceleration in China’s economic growth in the future for both Latin America and the rest of the world economy. The evidence reported also suggests that the emergence of China as an important source of world growth might be the driver of the so called “decoupling” of emerging markets business cycle from that of advanced economies reported in the existing literature.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5889.

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Length: 64 pages
Date of creation: Jul 2011
Date of revision:
Handle: RePEc:iza:izadps:dp5889

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Keywords: international business cycle; emerging markets; Great Recession; GVAR; China; Latin America; trade linkages;

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References

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Citations

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Cited by:
  1. Christian Dreger & Yanqun Zhang, 2013. "Does the economic integration of China affect growth and inflation in industrial countries?," FIW Working Paper series 116, FIW.
  2. Feldkircher, Martin, 2013. "A Global Macro Model for Emerging Europe," Working Papers 185, Oesterreichische Nationalbank (Austrian Central Bank).
  3. Xu, T.T., 2012. "The role of credit in international business cycles," Cambridge Working Papers in Economics 1202, Faculty of Economics, University of Cambridge.
  4. Bailey, Natalia & Kapetanios, George & Pesaran, M. Hashem, 2012. "Exponent of Cross-sectional Dependence: Estimation and Inference," IZA Discussion Papers 6318, Institute for the Study of Labor (IZA).
  5. Paul Cashin & Kamiar Mohaddes & Mehdi Raissi, 2012. "The Global Impact of the Systemic Economies and MENA Business Cycles," IMF Working Papers 12/255, International Monetary Fund.
  6. Ambrogio Cesa-Bianchi, 2012. "Housing Cycles and Macroeconomic Fluctuations: A Global Perspective," Research Department Publications 4810, Inter-American Development Bank, Research Department.
  7. Bicu, Andreea & Candelon, Bertrand, 2013. "On the importance of indirect banking vulnerabilities in the Eurozone," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5007-5024.
  8. Winkelried, Diego & Saldarriaga, Miguel, 2013. "Socios comerciales y crecimiento en América Latina: Un enfoque SVAR dinámico," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 25, pages 81-102.
  9. Annari de Waal & Renee van Eyden, 2013. "The impact of economic shocks in the rest of the world on South Africa: Evidence from a global VAR," Working Papers 201328, University of Pretoria, Department of Economics.
  10. repec:dgr:umamet:2012033 is not listed on IDEAS
  11. Yilmaz Akyüz, 2012. "The Staggering Rise of the South?," Working Papers 2012/3, Turkish Economic Association.
  12. Carolina Osorio & D. Filiz Unsal, 2011. "Inflation Dynamics in Asia: Causes, Changes, and Spillovers from China," IMF Working Papers 11/257, International Monetary Fund.
  13. Annari de Waal & Renee van Eyden & Rangan Gupta, 2013. "Do we need a global VAR model to forecast inflation and output in South Africa?," Working Papers 201346, University of Pretoria, Department of Economics.
  14. Eickmeier, Sandra & Kühnlenz, Markus, 2013. "China's role in global inflation dynamics," Discussion Papers 07/2013, Deutsche Bundesbank, Research Centre.
  15. Winkelried, Diego & Saldarriaga, Miguel, 2012. "Trade linkages and growth in Latin America: A time-varying SVAR approach," Working Papers 2012-011, Banco Central de Reserva del Perú.
  16. Feldkircher, Martin & Korhonen, Iikka, 2012. "The rise of China and its implications for emerging markets - Evidence from a GVAR model," BOFIT Discussion Papers 20/2012, Bank of Finland, Institute for Economies in Transition.

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