Abrego, L. and P. Osterholm, 2008. “External Linkages and Economic Growth in Colombia: Insights from a Bayesian VAR Model” IMF Working Paper 08/46, (Washington, D.C.: International Monetary Fund).
Osterholm, P. and J. Zettelmeyer, 2007. “The effect of External Conditions on Growth in Latin America” IMF Working Paper 07/176, (Washington, D.C.: International Monetary Fund).
Prepared by Gustavo Adler and Mario Mansilla.
A Matlab facility developed by M. Villani is used to estimate the model. For a description of the methodology and similar country applications see Abrego & Osterholm (2008) and Osterholm & Zettelmeyer (2007).
Alternative specifications—including the real effective exchange rate as a control variable or including alternative measures of external financial conditions (like the High Yield bond spread or the VIX index)—were explored but did not improve the results.
The estimates could also be upward biased due to effect of the 2002-03 financial crisis, when Uruguay’s GDP contracted significantly while the EMBILA shot up mainly reflecting Argentina’s sovereign default and the uncertainty associated to the Brazilian presidential election.
An adverse scenario in mature markets where the fight against inflation pushes international interest rates up, could affect Uruguay through an increase in the debt service burden—especially if combined with higher debt spreads to emerging markets—although Uruguay’s debt management has reduced the potential impact of that scenario for the immediate future.