Effects of external shocks on macroeconomic fluctuations in Pacific Alliance countries

Gabriel Rodríguez, Renato Vassallo, Paul Castillo B.

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

Given Pacific Alliance (PA) countries’ dependence on the external sector amidst volatile global financial conditions and increased trade openness, it is important to understand the time-varying impact of external shocks on these economies to assess their resilience. We use data for 1994Q1-2019Q4 and VAR models with time-varying parameters and stochastic volatility to study the heterogeneity of responses to financial, real, and nominal external shocks. The results suggest that external shocks have played a significant role in domestic cycles (50% on average), but their impact became temporarily larger during the global low-interest-rate period; i.e., the impact of export price and Fed rate shocks on GDP increased the most, peaking in 2002–2011, whereas the effect of shocks originating in China, although the largest, remained stable. In addition, a more predictable and countercyclical monetary policy in response to commodity price shocks diminished the transmission of external shocks, thereby increasing PA economies’ external resilience.

Original languageEnglish
Article number106302
JournalEconomic Modelling
Volume124
DOIs
StatePublished - Jul 2023

Keywords

  • Autoregressive vectors with time-varying parameters
  • Bayesian estimation and comparison
  • External shocks
  • Macroeconomic fluctuations
  • Pacific Alliance countries
  • Stochastic volatility

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