DP3963 The Transmission of US Shocks to Latin America

Author(s): Fabio Canova

Publication Date: July 2003

Keyword(s): structural shocks , business cycles , exchange rate regimes , bayesian methods

JEL(s): C68 , E32 , F11

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3963.asp

I study whether and how US shocks are transmitted to eight Latin American countries. US shocks are identified using the procedure of Canova and De Nicolo’ (2002) and treated as exogenous with respect to Latin American economies. Posterior estimates for individual and average effects are constructed. US Monetary shocks produce significant fluctuations in Latin America, but real demand and supply shocks do not. Floaters and currency boarders display similar output responses but different inflation and interest rate responses. The financial channel plays a crucial role in the transmission. US disturbances explain important portions of the variability Latin American macrovariables, produce continental cyclical fluctuations and, in two episodes, destabilizing nominal exchange rate effects. Policy implications are discussed.