Trade Flows, Financial Linkage, and Business Cycles in Latin America

This paper studies co-movements in real output growth across countries of Latin America in the sample period 1970-2007. To detect the change over time, correlations in real growth are analyzed over two sub-samples: 1970-1986 and 1987-2007. Correlation coefficients detect co-movements in real growth across five regional groups: Andean, Caribbean, Central America, LAC7(Argentina, Brazil, Chile, Columbia, Mexico, Peru, Venezuela) and Mercosur. In addition, growth in each of the EU, the U.S., and Brazil are assumed to be common sources of co-movements in real output growth in Latin America. Business-cycle comovements within and across regions have varied over time. We also examine the impact of trade flows and financial linkage on co-movements in real growth within and across regions. The effect of trade flows is not conclusive. Business cycles may diverge, converge, or not vary significantly in response to trade flows across countries. More recently, co-movement in real growth appears to be tracking comovement in short-term interest rates across Latin America.