The Influence of 'Big Brothers': How Important are Regional Factors for Uruguay?

27 Pages Posted: 15 Mar 2010

See all articles by Sebastiàn Sosa

Sebastiàn Sosa

International Monetary Fund (IMF) - Western Hemisphere Department

Date Written: February 2010

Abstract

This paper examines the role played by regional factors in Uruguay, identifies the sources and transmission mechanisms of shocks stemming from the region, and assesses how vulnerable Uruguay is to a potential crisis in the region. Using a VAR model with block exogeneity restrictions, it finds that shocks from Argentina - which account for about 20 percent of Uruguayan output fluctuations - have large and rapid effects. This is mainly due to the existence of idiosyncratic real and financial linkages between Uruguay and Argentina, which also explain the very high correlation between their business cycles. The analysis of previous crises in the region suggests that despite the importance of these strong linkages, and despite the fact the two deepest crises in recent Uruguayan history followed crises in Argentina, Uruguay is now clearly less vulnerable to financial contagion from the region.

Keywords: Argentina, Banking crisis, Banking systems, Business cycles, Cross country analysis, Economic growth, Economic integration, Economic models, Regional shocks, Spillovers, Uruguay

Suggested Citation

Sosa, Sebastian, The Influence of 'Big Brothers': How Important are Regional Factors for Uruguay? (February 2010). IMF Working Paper No. 10/60, Available at SSRN: https://ssrn.com/abstract=1569957

Sebastian Sosa (Contact Author)

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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