A Financially Driven Business Cycle for Latin America and the Caribbean

Esteban Pérez Caldentey and Matías Vernengo
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Esteban Pérez Caldentey: Economic Development Division, ECLAC, Santiago - Chile
Matías Vernengo: Faculty of Latin America Studies, Bucknell University, Pennsylvania - USA

Economia Internazionale / International Economics, 2024, vol. 77, issue 1, 5-36

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.

Keywords: Center-Periphery; Financial Cycle; Latin America; Transmission Mechanisms; Unit of Account (search for similar items in EconPapers)
JEL-codes: E42 E58 F41 (search for similar items in EconPapers)
Date: 2024
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