Business Cycles Fluctuations in Latin America before and after the Upsurge of China

Abstract

In this paper I use a factor structural vector autoregression to estimate if the cycles of Latin America are now more influenced by global conditions. I study this question as the region has proven to be resilient in terms of economic growth after the global financial crisis in spite of being more integrated with the world economy. In particular, I try to assess if the resilience of the region relates to a greater integration to the Chinese economy while being less in line with the cycles of the United States. In my estimations I decompose the variance of the error term of a factor structural VAR of the four largest Latin American countries (Argentina, Brazil, Chile and Mexico) with its three largest trade partners (the United States, the European Union and China). At the same time, I contrast two periods, the fifteen years before and after China joined the World Trade Organization. My results indicate that the cycles of most Latin American countries are now more heavily driven by global shocks, and at the same time these nations tend to see a reduction in their variance during 2002-17 relative to 1987-2001. This behavior takes place at the same time that China increases its role in the global economy while reduces the magnitude and propagation of its domestic shocks.