The role of international currency spillovers in shaping exchange rate dynamics in Latin America

Abstract

In this study, we explore the dynamic interconnectedness of major international currencies and select Latin American currencies utilising the advanced Quantile-VAR methodology. Our analysis includes periods of exceptional crises, including the COVID-19 pandemic and the Russia–Ukraine conflict. Our findings reveal that during such crises, the direct influence of major international currencies on Latin American exchange rates diminishes. The Argentinian and Uruguayan pesos predominantly absorb shocks, while the Brazilian real and the Peruvian sol emerge as primary spillover generators. Notably, currency devaluation against the US dollar is a pivotal benchmark, marking shifts in spillover directions. Crises further intensify these connectedness patterns. Contrary to prior research suggesting developing economies primarily receive shocks from advanced economies, our results underscore more complex interactions, especially during extreme market conditions, presenting a more nuanced perspective on currency connectedness.