## Latin America: Riding the Global Financial Waves

_IMF Blog, June 17, 2012_

## Source details

**Canonical URL:** [Latin America: Riding the Global Financial Waves](https://www.imf.org/en/blogs/articles/2012/06/17/latin-america-riding-the-global-financial-waves)

## Other formats

- [Markdown version](/en/blogs/articles/2012/06/17/latin-america-riding-the-global-financial-waves/index.md)
- [Structured JSON version](/en/blogs/articles/2012/06/17/latin-america-riding-the-global-financial-waves/index.json)
- [Bundle manifest](/en/blogs/articles/2012/06/17/latin-america-riding-the-global-financial-waves/bundle-manifest.json)

## Bibliographic details
- Authors: Gustavo Adler, Camilo E Tovar
- Published: June 17, 2012

---

### Overview and context
- Authors: Gustavo Adler, Camilo E. Tovar
- Date: June 17, 2012
- Focus: Impact of global financial shocks on Latin America, isolating the effect of financial shocks from commodity prices and global demand shocks.
- Background: Global financial markets have seen frequent bouts of severe stress since 2008. Global financial shocks have occurred on average every 2½ years since 1990, with significant effects on Latin America.

### Opposing forces shaping vulnerability
- Two key factors determine the impact of external financial shocks on domestic output:
  - Degree of financial linkages (financial integration) with the rest of the world.
  - Strength of the country’s economic fundamentals.
- Dynamics:
  - Higher financial integration can increase sensitivity to external financial shocks.
  - Stronger fundamentals mitigate shock impacts by: maintaining confidence in macroeconomic management, discouraging capital outflows, and easing economic adjustment after shocks.
- Regional trend:
  - Over the past two decades, financial integration has deepened in Latin America.
  - Key economic fundamentals have improved markedly, particularly those related to external and fiscal sustainability.
  - Given these opposing forces, net vulnerability is not obvious a priori.

### Empirical assessment (sample and approach)
- Sample: 40 emerging and 9 small advanced economies.
- Episodes: Seven episodes of global financial stress since 1990.
- Analytical aim: Assess importance of different economic fundamentals in amplifying or mitigating the impact of global financial shocks, holding commodity-price and global-demand effects constant.

### Main findings
- Exchange rate flexibility is a key shock absorber, especially for financially integrated economies.
- A country’s external position (for example, its current account balance and external debt) influences performance during external crises.
- Higher financial integration does not always increase vulnerability:
  - Financial integration amplifies financial shocks in economies with fixed exchange rate regimes.
  - Financial integration mitigates financial shocks in economies with more flexible exchange rate regimes.
- Net implication: Financially integrated economies with strong fundamentals (especially exchange rate flexibility) are better equipped to cope with global financial shocks than economies with weak fundamentals and limited financial linkages.

### Regional conclusion and policy implication
- Simulations show that despite increasing financial integration, output costs associated with global financial shocks in Latin America have declined in the past 15 years.
- The progress on economic fundamentals appears to have reduced vulnerability and helped the region “ride more safely” through recent global financial waves.
- Policy recommendation: The region should still take precautions in case of a bigger global downturn, even though recent policy improvements have paid off.

*Source: Latin America: Riding the Global Financial Waves — IMF blog post by Gustavo Adler and Camilo E. Tovar, June 17, 2012.*

---


## References

- [https://www.imf.org/wp-content/uploads/2012/06/slide2-22.jpg](https://www.imf.org/wp-content/uploads/2012/06/slide2-22.jpg)
- [Latin America](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR042512A.htm)
- [Regional Economic Outlook: Western Hemisphere](http://www.imf.org/external/pubs/ft/reo/reorepts.aspx?ddlRegions=12&ddlYear=-1)
- [effects of terms-of-trade shocks](http://blogs.imf.org/2011/11/01/latin-americas-commodity-dependence-what-if-the-boom-turns-to-bust/)
- [more](http://blogs.imf.org/2012/05/10/latin-america-vulnerabilities-under-construction/)
- [https://www.imf.org/wp-content/uploads/2012/06/slide1.jpg](https://www.imf.org/wp-content/uploads/2012/06/slide1.jpg)
- [Latin America](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR042012A.htm)
- [https://www.imf.org/wp-content/uploads/2012/06/slide3-2.jpg](https://www.imf.org/wp-content/uploads/2012/06/slide3-2.jpg)
- [pointed out](http://blogs.imf.org/2012/02/10/the-impact-of-the-gloomier-global-outlook-on-latin-america/)

_Source: https://www.imf.org/en/blogs/articles/2012/06/17/latin-america-riding-the-global-financial-waves_