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Disentangling business cycles and macroeconomic policy in Mercosur: a VAR and unobserved components model approaches

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Monetary integration in Mercosur processed in a context of strong macroeconomic volatility. This paper analyzes the feasibility of a monetary union within this zone. Instead of taking in account all the criteria of the optimal currencies areas, this study focuses on the macroeconomic cycles in Argentina, Brazil, and Uruguay. First, we analyse cross-correlation to identify the degree of cycle synchronization. Second, a structural VAR model is built for each country. It allows us to determine the sources of shocks which hit these countries. Third, we decompose structural innovations -especially economic policies shocks- of domestic SVAR into unobservable common and idiosyncratic components using a state-space model. We assess in what extent economic policies are coordinated between the Mercosur countries.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2006-15.

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Date of creation: 2006
Handle: RePEc:fce:doctra:0615
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  1. Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 975-1009.
  2. Barry Eichengreen, 1998. "Does Mercosur Need a Single Currency," NBER Working Papers 6821, National Bureau of Economic Research, Inc.
  3. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Hochreiter, Eduard & Schmidt-Hebbel, Klaus & Winckler, Georg, 2002. "Monetary union: European lessons, Latin American prospects," The North American Journal of Economics and Finance, Elsevier, vol. 13(3), pages 297-321, December.
  5. Sebastian Edwards, 2006. "Monetary unions, external shocks and economic performance: A Latin American perspective," International Economics and Economic Policy, Springer, vol. 3(3), pages 225-247, December.
  6. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October.
  7. Barry Eichengreen & Alan M. Taylor, 2003. "The Monetary Consequences of a Free Trade Area of the Americas," NBER Working Papers 9666, National Bureau of Economic Research, Inc.
  8. Martín Gonzalez Rozada & José Fanelli, 2003. "Business Cycle and Macroeconomic Policy Coordination in MERCOSUR," Business School Working Papers uno, Universidad Torcuato Di Tella.
  9. Sebastian Edwards, 2006. "Monetary Unions, External Shocks and Economic Performance," Working Papers 126, Oesterreichische Nationalbank (Austrian Central Bank).
  10. Robert Rennhack & Masahiro Nozaki, 2006. "Financial Dollarization in Latin America," IMF Working Papers 06/7, .
  11. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
  12. Nick Chamie (Bank of Canada), & Alain DeSerres (Bank of Canada), & Rene Lalonde (Bank of Canada), "undated". "Optimum Currency Areas and Shock Asymmetry: A Comparison of Europe and the United States," Staff Working Papers 94-1, Bank of Canada.
  13. Ahmed, Shaghil, 2003. "Sources of economic fluctuations in Latin America and implications for choice of exchange rate regimes," Journal of Development Economics, Elsevier, vol. 72(1), pages 181-202, October.
  14. Harvey,Andrew C., 1991. "Forecasting, Structural Time Series Models and the Kalman Filter," Cambridge Books, Cambridge University Press, number 9780521405737, October.
  15. repec:rus:hseeco:123906 is not listed on IDEAS
  16. Paul Hallwood & Ian W. Marsh & Joerg Scheibe, 2004. "An Assessment of the Case for Monetary Union or Official Dollarization in Argentina, Brazil, Chile, Uruguay and Venezuela," Working papers 2004-13, University of Connecticut, Department of Economics.
  17. Nick Chamie & Alain DeSerres & Rene Lalonde, 1994. "Optimum Currency Areas and Shock Asymmetry A Comparison of Europe and the United States," International Finance 9406001, EconWPA, revised 23 Jun 1994.
  18. Norman Loayza & J. Humberto Lopez & Angel J. Ubide, 1999. "Sectorial Macroeconomic Interdependencies; Evidence for Latin America, East Asia and Europe," IMF Working Papers 99/11, .
  19. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2014. "Addicted to Dollars," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 1-50, May.
  20. Larrain Felipe & Jose Tavares, 2003. "Regional Currencies Versus Dollarization: Options for Asia and the Americas," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 6(1), pages 35-49.
  21. P. Geoffrey Allen & Robert Fildes, 2005. "Levels, Differences and ECMs - Principles for Improved Econometric Forecasting," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(s1), pages 881-904, December.
  22. Scott, Alasdair, 2003. "APPLIED MACROECONOMETRICS Carlo A. Favero Oxford University Press, 2001," Macroeconomic Dynamics, Cambridge University Press, vol. 7(02), pages 313-315, April.
  23. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, World Bank Group, vol. 14(2), pages 251-285, May.
  24. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, September.
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