IDEAS home Printed from https://ideas.repec.org/a/ris/ecoint/0961.html
   My bibliography  Save this article

A Financially Driven Business Cycle for Latin America and the Caribbean

Author

Listed:
  • Pérez Caldentey, Esteban

    (Economic Development Division, ECLAC, Santiago - Chile)

  • Vernengo, Matías

    (Faculty of Latin America Studies, Bucknell University, Pennsylvania - USA)

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.

Suggested Citation

  • Pérez Caldentey, Esteban & Vernengo, Matías, 2024. "A Financially Driven Business Cycle for Latin America and the Caribbean," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 77(1), pages 5-36.
    • Handle: RePEc:ris:ecoint:0961
    as

    Download full text from publisher

    File URL: https://www.iei1946.it/article/pdf/download/1077/a-financially-driven-business-cycle-for-latin-america-and-the-caribbean
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Peter Blair Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 887-935, December.
    2. Peter Henry, 2007. "Capital Account Liberalization: Theory, Evidence, and Speculation," Discussion Papers 07-004, Stanford Institute for Economic Policy Research.
    3. J. S. L. McCombie & A. P. Thirlwall, 1994. "Economic Growth and the Balance-of-Payments Constraint," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-23121-8, December.
    4. Michael Chui & Emese Kuruc & Philip Turner, 2016. "A new dimension to currency mismatches in the emerging markets - non-financial companies," BIS Working Papers 550, Bank for International Settlements.
    5. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 1, pages 35-54, November.
    6. Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, August.
    7. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004, October.
    8. Esteban Pérez Caldentey & Nicole Favreau Negront & Luis Méndez Lobos, 2019. "Corporate debt in Latin America and its macroeconomic implications," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 42(3), pages 335-362, July.
    9. Carol Bertaut & Valentina Bruno & Hyun Song Shin, 2023. "Original sin redux: role of duration risk," BIS Working Papers 1109, Bank for International Settlements.
    10. Robert A. Blecker, 2023. "How important is the real exchange rate for exports and growth?," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 20(2), pages 250-265, November.
    11. Michael Chui & Emese Kuruc & Philip Turner, 2018. "Leverage and currency mismatches: Non‐financial companies in the emerging markets," The World Economy, Wiley Blackwell, vol. 41(12), pages 3269-3287, December.
    12. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521460477, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Haoyuan Ding & Xiao Li & Jiezhou Ying, 2023. "Anti‐dumping Policies and International Portfolio Allocation: The View from the Global Funds," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(2), pages 58-83, March.
    2. Forbes, Kristin J. & Warnock, Francis E., 2021. "Capital flow waves—or ripples? Extreme capital flow movements since the crisis," Journal of International Money and Finance, Elsevier, vol. 116(C).
    3. Nelson H. Barbosa Filho, 2004. "Growth, exchange rates and trade in Brazil: a structuralist post-Keynesian approach," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 14(2), pages 59-86, May-Augus.
    4. Aizenman, Joshua & Ito, Hiro, 2012. "Trilemma policy convergence patterns and output volatility," The North American Journal of Economics and Finance, Elsevier, vol. 23(3), pages 269-285.
    5. Jaume Ventura & Fernando Broner, 2008. "Rethinking the effects of financial liberalization," 2008 Meeting Papers 747, Society for Economic Dynamics.
    6. Perez Caldentey, Esteban & Ali, Anesa, 2010. "Growth and convergence/divergence in productivity under balance-of-payments constraint," MPRA Paper 20056, University Library of Munich, Germany.
    7. Bozhechkova, Alexandra (Божечкова, Александра) & Goryunov, Evgeny (Горюнов, Евгений) & Sinelnikov-Murylev, Sergey (Синельников-Мурылев, Сергей) & Trunin, Pavel V. (Трунин, Павел), 2017. "Capital Controls: World Experience and Lessons for Russia [Ограничения На Движение Капитала: Мировой Опыт И Уроки Для России]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 2, pages 8-43, April.
    8. Anusha Chari & Karlye Dilts Stedman & Christian T. Lundblad, 2020. "Capital Flows in Risky Times: Risk-On / Risk-Off and Emerging Market Tail Risk," Research Working Paper RWP 20-08, Federal Reserve Bank of Kansas City.
    9. Fernando Broner & Jaume Ventura, 2016. "Rethinking the Effects of Financial Globalization," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1497-1542.
    10. Ricardo Reis, 2013. "The Portugese Slump and Crash and the Euro Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 143-210.
    11. Juan Carlos Moreno Brid & Esteban Pérez Caldentey, 2010. "Trade and Economic Growth: A Latin American Perspective on Rhetoric and Reality," Chapters, in: Mark Setterfield (ed.), Handbook of Alternative Theories of Economic Growth, chapter 20, Edward Elgar Publishing.
    12. Bilge Erten & Anton Korinek & José Antonio Ocampo, 2021. "Capital Controls: Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 59(1), pages 45-89, March.
    13. World Bank Group, 2016. "Global Economic Prospects, January 2016," World Bank Publications - Books, The World Bank Group, number 23435.
    14. Ron Alquist & Benjamin Chabot, 2012. "Institutions, the cost of capital, and long-run economic growth: evidence from the 19th century capital market," Working Paper Series WP-2012-17, Federal Reserve Bank of Chicago.
    15. Anwar M. Shaikh, 1999. "Real Exchange Rates and the International Mobility of Capital," Economics Working Paper Archive wp_265, Levy Economics Institute.
    16. Maurice Obstfeld, 2009. "International Finance and Growth in Developing Countries: What Have We Learned?," NBER Working Papers 14691, National Bureau of Economic Research, Inc.
    17. Verberi, Can & Yasar, Sema & Sugozu, Ibrahim Halil, 2023. "Capital liberalization, growth and moral hazard: Lessons from the global financial crisis," International Review of Financial Analysis, Elsevier, vol. 90(C).
    18. Frankel, Jeffrey, 2010. "Monetary Policy in Emerging Markets," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 25, pages 1439-1520, Elsevier.
    19. Yung Chul Park & Shinji Takagi, 2012. "Managing Capital Flows in an Economic Community: The Case of ASEAN Capital Account Liberalization," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 8(3), pages 299-320, August.
    20. Bodart, Vincent & Reding, Paul, 1999. "Exchange rate regime, volatility and international correlations on bond and stock markets," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 133-151, January.

    More about this item

    Keywords

    Center-Periphery; Financial Cycle; Latin America; Transmission Mechanisms; Unit of Account;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:ecoint:0961. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Angela Procopio (email available below). General contact details of provider: https://edirc.repec.org/data/cacogit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.