| By: |
Cesa-Bianchi, Ambrogio (Inter-American Development Bank);
Pesaran, Hashem (University of Cambridge);
Rebucci, Alessandro (Inter-American Development Bank);
Xu, TengTeng (University of Cambridge) |
| Abstract: |
The international business cycle is very important for Latin America’s
economic performance as the recent global crisis vividly illustrated. This
paper investigates how changes in trade linkages between China, Latin America,
and the rest of the world have altered the transmission mechanism of
international business cycles to Latin America. Evidence based on a Global
Vector Autoregressive (GVAR) model for 5 large Latin American economies and
all major advanced and emerging economies of the world shows that the
long-term impact of a China GDP shock on the typical Latin American economy
has increased by three times since mid-1990s. At the same time, the long-term
impact of a US GDP shock has halved, while the transmission of shocks to Latin
America and the rest of emerging Asia (excluding China and India) GDP has not
undergone any significant change. Contrary to common wisdom, we find that
these changes owe more to the changed impact of China on Latin America’s
traditional and largest trading partners than to increased direct bilateral
trade linkages boosted by the decade long commodity price boom. These findings
help to explain why Latin America did so well during the global crisis, but
point to the risks associated with a deceleration in China’s economic growth
in the future for both Latin America and the rest of the world economy. The
evidence reported also suggests that the emergence of China as an important
source of world growth might be the driver of the so called “decoupling” of
emerging markets business cycle from that of advanced economies reported in
the existing literature. |
| Keywords: |
China, GVAR, Great Recession, emerging markets, international business cycle, Latin America, trade linkages |
| JEL: |
C32 E32 O54 |
| Date: |
2011–07 |
| URL: |
http://d.repec.org/n?u=RePEc:iza:izadps:dp5889&r=cna |