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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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  1. TengTeng Xu, 2012. "The Role of Credit in International Business Cycles," Working Papers 12-36, Bank of Canada.
  2. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, 07.
  3. Ambrogio Cesa-Bianchi, 2012. "Housing Cycles and Macroeconomic Fluctuations: A Global Perspective," Research Department Publications 4810, Inter-American Development Bank, Research Department.
  4. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2006. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Computing in Economics and Finance 2006 47, Society for Computational Economics.
  5. M. Hashem Pesaran & Til Schuermann & L. Vanessa Smith, 2008. "Forecasting Economic and Financial Variables with Global VARs," CESifo Working Paper Series 2263, CESifo Group Munich.
  6. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
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  12. Garratt, Anthony & Lee, Kevin & Pesaran, M. Hashem & Shin, Yongcheol, 2006. "Global and National Macroeconometric Modelling: A Long-Run Structural Approach," OUP Catalogue, Oxford University Press, number 9780199296859.
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  17. Stéphane Dées & M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2010. "Supply, demand and monetary policy shocks in a multi-country New Keynesian Model," Working Paper Series 1239, European Central Bank.
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  22. Engle, R. F. & Granger, C. W. J. (ed.), 1991. "Long-Run Economic Relationships: Readings in Cointegration," OUP Catalogue, Oxford University Press, number 9780198283393.
  23. Pesaran, M. Hashem & Shin, Yongcheol, 1996. "Cointegration and speed of convergence to equilibrium," Journal of Econometrics, Elsevier, vol. 71(1-2), pages 117-143.
  24. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-36, July.
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Citations

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Cited by:
  1. Natalia Bailey & George Kapetanios & M. Hashem Pesaran, 2012. "Exponent of Cross-sectional Dependence: Estimation and Inference," CESifo Working Paper Series 3722, CESifo Group Munich.
  2. 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.
  3. TengTeng Xu, 2012. "The Role of Credit in International Business Cycles," Working Papers 12-36, Bank of Canada.
  4. Bicu Andreea & Candelon Bertrand, 2012. "On the importance of indirect banking vulnerabilities in the Eurozone," Research Memoranda 033, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
  5. Carolina Osorio & D. Filiz Unsal, 2011. "Inflation Dynamics in Asia: Causes, Changes, and Spillovers from China," IMF Working Papers 11/257, International Monetary Fund.
  6. Yilmaz Akyüz, 2012. "The Staggering Rise of the South?," Working Papers 2012/3, Turkish Economic Association.
  7. 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.
  8. 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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