Bergara, Mario, Daniel Dominioni, and José A. Licandro, 1995, “Un Modelo Para Comprender la Enfermedad Uruguaya,” Revista de Economía, Banco Central del Uruguay, Vol. II, Number 2, pp. 39–76, November.
Bevilaqua, Alfonso, Marcelo Catena, and Ernesto Talvi, 2001, “Integration, Interdependence, and Regional Goods: An Application to Mercosur,” Economía, Vol. 2, Number 1.
Bevilaqua, Alfonso, Marcelo Catena, and Ernesto Talvi, 1999, “Macroeconomic Interdependence in Mercosur,” World Bank Project Report. (Washington: The World Bank Group).
Calvo, Guillermo, Leonardo Leiderman, and Carmen Reinhart, 1993, “Capital Inflows and the Real Exchange Rate in Latin America: the Role of External Factors,” Staff Papers, Vol. 40, pp. 108–50 (Washington: International Monetary Fund).
Calvo, Guillermo, Eduardo Fernandez Arias, and Ernesto Talvi, 2001, “The Growth-Interest-Rate Cycle in the United States and its Consequences for Emerging Markets,”Inter-American Development Bank Working Paper No. 458.
Calvo, Guillermo, and Alejandro Izquierdo, 2003, “Sudden Stops, the Real Exchange Rate and Fiscal Sustainability: Argentina’s Lessons,” NBER Working Paper No. 9828.
Calvo, Guillermo, and Alejandro Izquierdo, 2005, “Sudden Stop, Financial Factors and Economic Collapse in Latin America: Learning from Argentina and Chile,” NBER Working Paper No. 9828.
Eble, Stephanie, 2006, “Uruguay’s Growth Story,” in IMF Selected Issues Paper, Country Report No. 06/427 (Washington: International Monetary Fund).
Favaro, Edgardo and Claudio Sapelli, 1989, “Shocks externos, grado de apertura y política doméstica,” Banco Central del Uruguay, Montevideo, Uruguay.
Kamil, Herman, and Fernando Lorenzo, 1998, “Caracterización de las Fluctuaciones Cíclicas en la Economía Uruguaya,” Revista de Economía, Banco Central del Uruguay, Vol. 5(1).
Masoller, Andrés, 1998, “Shocks Regionales y el Comportamiento de la Economía Uruguaya entre 1974 y 1997,” Revista de Economía, Banco Central del Uruguay, Vol. V, Number 1, pp. 141–214 May.
Talvi, Ernesto, 1995, “A ‘Big Brother’ Model of a Small Open Economy: The Impact of Argentina on Uruguay’s Business Cycle,” Ph.D. dissertation, University of Chicago.
Voelker, Juan, 2004, “Shocks Regionales, Dependencia Comercial y Desempeño Sectorial de la Economía Uruguaya,” Revista de Economía, Banco Central del Uruguay, Vol. XI, Number 1, pp. 281–334, May.
The author is grateful to Gastón Gelos and Rodrigo Valdés for helpful discussions and to Gerardo Licandro, Andrés Masoller, and Herman Kamil for their valuable comments on an earlier draft of this paper.
Rolling correlations were computed using 16-quarter windows, considering lags of one quarter for Argentina’s GDP cycle and three quarters for Brazil’s, based on the cross-correlogram for the whole period.
It is worth noting that the correlation with Argentina in recent years is partly explained by the fact that both economies experienced a simultaneous strong recovery following the 2001 and 2002 crises.
This could reflect either a higher influence of Brazil, or a more similar reaction to global shocks.
Uruguay signed two preferential trade agreements with its regional neighbors. The first one was signed with Argentina (CAUCE) in 1974; the second one was signed with Brazil (PEC) in 1975.
Similarly, the share of Argentina in Uruguay’s total receipts from tourism reached almost 70 percent in the 1990s, and has declined to less than 45 percent in recent year
To our knowledge, the term “regional goods” was coined by Bergara, Dominioni, and Licandro (1994).
The larger share of regional goods in exports to Argentina has been documented by Bevilaqua, Catena, and Talvi (2001).
Some large Uruguayan banks had been exposed to Argentina from the assets side as well, especially before the 2002 crisis. However, such exposure is negligible today.
The rest of the world’s GDP is proxied by global GDP. Times series for categories such as advanced countries or the G-7 are not available for the whole period of analysis. Although Brazil, Argentina, and Uruguay are included in global GDP, it is not likely that they affect the global figure given their small relative size.
Changes in international real interest rates constitute an important factor driving portfolio capital inflows to Latin America, thus influencing business cycles across the region (Calvo, Leiderman, and Reinhart, 1993, and Calvo, Fernandez Arias, Reinhart, and Talvi, 2001). This link between international interest rates and capital flows to Latin America may be a consequence of a number of reasons. Low interest rates in mature markets may lead investors in those markets to seek higher returns in other markets, increasing the demand for emerging market assets. Not only does external financing become more abundant for emerging markets, but also the cost of borrowing declines as a consequence of the lower interest rates in the U.S. In fact, Fernandez Arias (1996) shows that country-risk premia in emerging markets is indeed affected by international interest rates, amplifying the interest rate cycles in mature markets.
The world real interest rate is computed using the six-month LIBOR and the CPI inflation rate of industrial countries. Oil prices are measured as the average of three crude oil spot prices (Dated Brent, WTI, and Dubai Fateh), in U.S. dollars per barrel. Non-fuel commodity prices are measured by the corresponding WEO Index, which includes Food and Beverages and Industrial Inputs Price Indices.
Standard unit root tests (augmented Dickey-Fuller) show that all variables are stationary in first differences. In addition, most cointegration tests suggest that the variables in the model are not cointegrated (i.e., the null hypothesis of no cointegration cannot be rejected). Hence, it seems adequate to estimate the model in first differences.
The lag length was selected according to the Schwarz information criterion. The Akaike Information Criterion (AIC) suggested four lags instead of one. The VAR was also estimated using four lags and the results do not change significantly.
The estimation results are robust to different orderings of endogenous variables.
For a horizon of eight quarters, which is when the percentages stabilize.
Uruguay also had some domestic vulnerabilities that exacerbated the impact of the external shock, in particular the high level of financial dollarization and large currency mismatches both in the public and private sectors.
Uruguay’s annual inflation rate was 80 percent and 113 percent in 1989 and 1990 respectively, much higher than in 1998 and 1999, where inflation rates were 11 percent and 6 percent respectively; the fiscal deficit represented 7.4 percent of GDP in 1989 and only 0.9 percent in 1998; the public debt-GDP ratio was 64 percent in 1989 and only 36 percent in 1998.
The implicit exchange rate risk index, measured as foreign currency credit to the non-tradable sector as a percentage of total credit, has declined from 55 percent in 2003 to below 35 percent in 2009.