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A Financially Driven Business Cycle for Latin America and the Caribbean

Author

Listed:
  • Pérez Caldentey, Esteban

    (Economic Development Division, ECLAC, Santiago - Chile)

  • Vernengo, Matías

    (Faculty of Latin America Studies, Bucknell University, Pennsylvania - USA)

Abstract

Three stylized facts characterize the international insertion of Latin America and the Caribbean: (i) the increasing outward orientation in trade and finance with increased indebtedness in international capital markets; (ii) the move towards more flexible exchange rates and (iii) the predominance of the United States dollar as the international reserve currency. The combination of these three stylized facts largely shapes the transmission mechanisms of the economic policy stance followed by developed (center) countries to developing (periphery) economies. This paper identifies and analyzes five transmission channels: (i) the positive and significant statistical association between variations in the nominal exchange rate and country risk; (ii) the existence of a positive correlation between the valuation of sovereign debt issued in foreign currency and that issued in local currency; (iii) the existence of a one way causality between sovereign risk and non-financial corporate sector risk; (iv) the existence of a non-linear relation between non-financial corporate sector leverage and gross fixed investment; and (v) the existence of a negative relation between movements in the real exchange rates and gross fixed investment. The analysis provides the building blocks of a non-neutral financially driven business cycle for Latin America, and more generally, for the periphery.

Suggested Citation

  • Pérez Caldentey, Esteban & Vernengo, Matías, 2024. "A Financially Driven Business Cycle for Latin America and the Caribbean," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 77(1), pages 5-36.
    • Handle: RePEc:ris:ecoint:0961
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Center-Periphery; Financial Cycle; Latin America; Transmission Mechanisms; Unit of Account;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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