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Macroeconomic Fluctuations in the Caribbean; The Role of Climatic and External Shocks

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  • Sebastian Sosa
  • Paul Cashin

Abstract

This paper develops country-specific VAR models with block exogeneity restrictions to analyze how exogenous factors affect business cycles in the Eastern Caribbean. It finds that external shocks play a key role, explaining more than half of macroeconomic fluctuations in the region. Domestic business cycles are especially vulnerable to changes in climatic conditions, with a natural disaster leading to an immediate and significant fall in output-but the effects do not appear to be persistent. Oil price and external demand shocks also contribute significantly to domestic macroeconomic fluctuations. An increase in oil prices (external demand) is contractionary (expansionary), and the effects dissipate up to three years after the shock.

Suggested Citation

  • Sebastian Sosa & Paul Cashin, 2009. "Macroeconomic Fluctuations in the Caribbean; The Role of Climatic and External Shocks," IMF Working Papers 09/159, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:09/159
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    References listed on IDEAS

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    3. Reinhart, Carmen & Calvo, Guillermo & Fernandez Arias, Eduardo & Talvi, Ernesto, 2001. "The Growth-Interest Rate Cycle in the United States and its Consequences for Emerging Markets," MPRA Paper 9075, University Library of Munich, Germany.
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    6. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
    7. Tobias N. Rasmussen, 2004. "Macroeconomic Implications of Natural Disasters in the Caribbean," IMF Working Papers 04/224, International Monetary Fund.
    8. Paul Cashin, 2004. "Caribbean Business Cycles," IMF Working Papers 04/136, International Monetary Fund.
    9. Raddatz, Claudio, 2007. "Are external shocks responsible for the instability of output in low-income countries?," Journal of Development Economics, Elsevier, vol. 84(1), pages 155-187, September.
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    Cited by:

    1. Tunc, Cengiz & Kılınç, Mustafa, 2016. "Exchange Rate Pass-Through in a Small Open Economy: A Structural VAR Approach," MPRA Paper 72770, University Library of Munich, Germany, revised 28 Jul 2016.
    2. Butkiewicz, James L. & Gordon, Leo-Rey C., 2013. "The Economic Growth Effect of Offshore Banking in Host Territories: Evidence from the Caribbean," World Development, Elsevier, vol. 44(C), pages 165-179.
    3. Sebastian Sosa, 2008. "External Shocks and Business Cycle Fluctuations in Mexico; How Important are U.S. Factors?," IMF Working Papers 08/100, International Monetary Fund.

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