Prepared by Sebastián Sosa.
The literature on Uruguay’s regional linkages has focused mainly on real shocks. In spite of their importance, the key financial linkages with Argentina have not been analyzed deeply. See Favaro and Sapelli (1986), Talvi (1994), Bergara, Dominioni and Licandro (1994), Masoller (1998), Bevilaqua, Catena and Talvi (1998), Kamil and Lorenzo (1998), Voelker (2004), and Eble (2006), among others.
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.
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.
Uruguayan banks had been exposed to Argentina from the assets side as well. Argentina accounted for about 20 percent of total bank credit before the 2002 crisis. However, that figure is negligible today.
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).
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.
The lag length—one quarter—was selected according to the Schwarz information criterion.
Standard VAR models may be estimated by Ordinary Least Squares (OLS). However, when some of the equations present regressors not included in others, Seemingly Unrelated Regressions (SUR) appear to provide more efficient estimates of the coefficients than OLS. Thus, the system is here estimated using SUR.
For a horizon of eight quarters, which is when the percentages stabilize.
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.