The Transmission of US Shocks To Latin American Economies

Abstract: This paper studies the transmission properties of US shocks to six Latin American countries. A model, underlying possible channels of transmissions, is presented and restrictions implied by the model are used to identify shocks. Empirically US shocks are extracted using the new two-step procedure of Canova and De Nicolo' (1999) and treated as exogenous with respect to Latin American economies. The results indicate that US shocks explain variable but signi ̄cant proportion of the °uctuations in in°ation, money and the trade balance. The e®ect on output, however, depends on the country. Both terms of trade and interest rate channels play a role in transmission but their relative importance depends on the type of shocks. Furthermore, while comovements of output in response to US shocks are small, comovements of in°ation and nominal balances in response to US shocks are large and positive. Finally, neither the exchange rate regime nor the degree of dollarization matter for the transmission of US shocks to Latin America. Few policy implications are drawn.