Output Fluctuations in Latin America: What Explains the Recent Slowdown?

The object of the paper is to explain Latin America’s growth slowdown experienced in 1998/99. To do so we used two complementary methodologies. The first one aimed at determining how much of the slowdown could be explained by specific external factors, namely, the terms of trade, international interest rates, spreads on external debt, capital flows and climatological factors (El Nino). Using quarterly GDP data for the 8 largest countries of the region, we estimate a dynamic panel that allowed to calculate that between 50% and 60% of the slowdown was due to the role of these external factors. The second approach allows for the role of some endogenous variables, like domestic real interest rates and real exchange rates, to affect output. Using monthly industrial production data, we estimate country-specific Generalized Vector Autoregressions (GVAR) for the largest countries. We found that during the whole sample period (1992-1998) output volatility was mostly associated with shocks to domestic factors, but the slowdown in the sub- period 1998-1999 was explained in more than 60% by the external factors’ shocks.