Working Paper: CEPR ID: DP7671
Authors: Marco Aiolfi; Luis A. V. Cato; Allan G. Timmermann
Abstract: We develop a common factor approach to reconstruct new business cycle indices for Argentina, Brazil, Chile, and Mexico ("LAC-4") from an unprecedentedly comprehensive dataset spanning 135 years. We establish the robustness of our indices through a variety of tests, use the indices to explore business cycle properties in LAC-4 and compare them with other countries across outward- and inward-looking policy regimes. We find that output persistence in LAC-4 has been consistently high across regimes, whereas volatility was strikingly high during the pre-1929 outward-looking regime but declined during the most recent shift towards greater openness. We also find a sizeable common regional factor driven by output and interest rates in advanced countries, including during inward-looking regimes
Keywords: factor models; international business cycles; Latin America
JEL Codes: E32; F41; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| significant shocks (E32) | prolonged output fluctuations (E32) |
| pre-1929 outward-looking regime (F01) | high volatility (C58) |
| recent shift towards greater openness (P39) | decline in volatility (E32) |
| common regional factor driven by output and interest rates in advanced countries (E49) | influence on LAC4 business cycles (E32) |
| fiscal policy in LAC4 (O23) | procyclical and highly volatile (E32) |
| inflation (E31) | countercyclical (E32) |
| business cycles in LAC4 (N16) | reasonable correlation across countries (O57) |
| global economic factors (F69) | shared response in business cycles in LAC4 (N16) |