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LAC-EU ECONOMIC FORUM 2013
Session 1
Cycles, Crisis and the Asymmetric Response of
Macroeconomic Policy
Distinctive features of the Latin American and Caribbean
business cycle
Daniel Titelman
Esteban Pérez Caldentey
Pablo Carvallo
Financing for Development Division
Main messages
•
Using quaterly data for the period 1990-2012 for a sample of 83 countries worldwide
we show that the Latin American and Caribbean (Latam) cycle exhibits two distinctive
features at the regional and sub regional levels:
 Expansions tend to be weaker in terms of duration and intensity relative to other
regions.
 Contractions are not longer or more intense than in other regions of the world.
•
These results are particularly relevant when comparing the dynamics of the cycle of
Latin America and the Caribbean to that of East Asia and the Pacific.
 Expansions last 33 and 14 quarters on average in East Asia and the Pacific and Latam
 The output gain in expansions is 39% and 26% in East Asia and the Pacific and Latam.
•
These distinctive features are also present in the behavior of productivity which is a key
determinant of long-run growth.
 The empirical evidence shows that in the expansionary phase of the cycle, the rise in
productivity in East Asia and the Pacific is roughly twice that of Latin America and the
Caribbean.
•
Another distinctive feature of the cycle dynamics in Latin America and the Caribbean
pertains to the fact that the effects of the contraction on public investment surpass those
of the expansion.
The methodology and approach
The characteristics of the cycle are analyzed using two standard cycle methodologies
Classical Cycle
Defines the cycle as a series of turning
points in the level of real aggregate
economic activity (Sequential pattern of
expansions and contractions ).
Deviation Cycle
Defines the cycle in terms of the
deviations of real aggregate economic
activity from its trend (or potential
output).
For each of the methodologies an algorithm was used (Bry-Boschan) to determine the
turning points in the series. In the case of the Classical cycle two other algorithms were
also performed (Calculus and Okun).
Once the turning points are identified two indicators were computed to characterize the cycle:
Duration
Amplitude
Amplitude and duration are used to assess the cumulative effect of an expansion or contraction
The Classical and Deviation Cycle methodologies produce different
characterizations of the cycle
• The Classical Cycle tends to produce shorter contractions than the Deviation
Cycle.
 A downturn in the Classical Cycle occurs when
 Contrarily, in the Deviation Cycle a downturn occurs when
• From the definition of a contraction in both methodologies, it follows that:
 The amplitude of a contraction in the Classical Cycle will always have a negative
sign.
 However, this need not be the case when applying the Deviation Cycle.
• The Deviation Cycle fails to capture the asymmetry between the contraction
and the expansion phases.
 In the Deviation Cycle the cyclical component is stationary and the positive and
negative deviations will tend to cancel out over time.
 Stationarity is not an issue in the Classical Cycle approach.
The exercises were carried out with a comprehensive and representative data set
The sample includes 83 countries worldwide among which 44 are emerging market economies (EMEs)
and 39 are high income economies (DC).
It includes all South American and Central American economies and six Caribbean economies.
Data sample for selected studies on the business cycle in developing countries and Latam
Countries EME
EME Regions
EAP ECA MENA SSA SA LAC
DC
Period
Variables
Financing for
Development Division
(2013)
Male (2009, 2010)
83
44
5
11
3
3
1
21
39
1989.1-2012.2
Quarterly
GDP
35
27
2
4
4
5
3
9
8
1960.1-2005.4
Quarterly
Du Plessis (2006)
24
2
1
…
…
1
…
2
22
1970.1-2005.1
Quarterly
Industrial and
agricultural
output
GDP, C, I, , r,
FS
Cashin (2004)
10
6
…
…
…
…
…
6
4
Craigwell (2004)
3
65
3
32
…
5
…
9
…
3
…
2
…
…
3
13
…
34
1963-2003
Yearly
Quarterly
Rand & Tarp (2002)
15
14
1
…
1
5
2
5
1
1960.1-1999.4
Quarterly
Pérez Caldentey &
Pineda (2010)
134
104
19
20
13
15
5
32
31
1950-2011
Yearly
Calderón & Fuentes
(2012)
Source: Financing For Development Division (2013)
1970.1-2010.2
Quarterly
GDP
GDP
GDP
Industrial
production
Index
GDP, GDP per
capita
The results show that, with independence of the methodology used, the duration of
expansions in Latin America and the Caribbean tend for the most part to be shorter
than those of other developing regions
Median quarterly duration the contractionary phase of the cycle for selected regions of
the world (1990-2012)
Classical Cycle
(In quarters)
Deviation Cycle
(In quarters)
East Asia and the Pacific
32.5
9.3
Europe and Central Asia
25.0
8.7
Latin America and the Caribbean
13.6
7.5
Middle East and North Africa
3.5
5.8
South Asia
…
8.5
Sub-Saharan Africa
37.5
8.0
High Income
23.0
7.7
Source: Financing For Development Division (2013)
In a similar manner, expansions are less intense than in other developing
regions
Median amplitude of the expansionary phase of the cycle for selected regions of the world
1990-2012
Classical Cycle
(In percentages)
Deviation Cycle
(In percentages)
East Asia and the Pacific
39.0
15.4
Europe and Central Asia
43.8
19.9
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
26.3
15.6
…
40.9
13.2
11.2
17.8
9.3
High Income
26.3
10.1
Source: Financing For Development Division (2013)
A similar result obtains at the sub regional level…
Median amplitude of the expansionary phase of the cycle for selected regions of the world
1990-2012
Classical Cycle
(In percentages)
East Asia and the Pacific
39.0
Europe and Central Asia
Latin America and the Caribbean
South America
Central America
Mexico
43.8
26.3
27.9
27.0
25.6
Middle East and North Africa
15.6
Sub-Saharan Africa
40.9
High Income
26.3
Source: Financing For Development Division (2013)
Placing the focus of analysis on the last expansionary phase in Latin America
and the Caribbean prior to the crisis (2003-2007) corroborates the comparative
amplitude result
•During the period 2003-2007 Latin America and the Caribbean recorded the
highest average rate of growth in over three decades.
The regional average per capita growth rate reached 3.7% surpassing not only that
of the 1980s (-0.8%), 1990s (1.4%) and also that of the 1970s (3.2%).
Other regions of the world also registered historical growth rates during this
period.
•A comparative analysis for this period shows that the median amplitude of the
expansion reached 30% for Latam and 50% for East Asia and the Pacific.
A similar result is obtained when comparing Latam and the Middle East and
North Africa
Turning to contractions, the evidence indicates that their duration in the case of
Latin America and the Caribbean tends to conform to those of other regions
Quarters
Median quarterly duration the contractionary phase of the cycle for selected regions of
the world
Source: Financing For Development Division (2013)
Also, the intensity of the contraction in Latin America and the Caribbean does
not differ significantly from that of other regions of the world
Percentages
Median amplitude of the contractionary phase of the cycle for selected regions of the world
1990-2012 (In percentages)
Source: Financing For Development Division (2013)
The dynamics and distinctive features of the Latin American and
Caribbean cycle are not exclusively relevant to the short-run…
These are also reflected in the behavior of variables such as productivity and investment
which are generally identified as determinants of long-run growth.
Duration and amplitude of the expansionary phase of the labour productivity cycle for selected
regions of the world using the Classical Cycle methodology. 1990-2012
East Asia and the Pacific
Europe and Central Asia
Latin America and the Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Amplitude
(Percentage)
23.4
33.7
13.6
17.2
16.0
8.5
Duration
(Years)
4.3
5.5
3.8
3.3
4.8
2.6
High Income
17.7
6.3
Source: Financing For Development Division (2013)
Another distinctive feature linking short-run cycle fluctuations to longrun growth is provided by the asymmetric behavior of investment
Available data for six of the largest economies of the region show that the declines in public
infrastructure investment expenditure in the contractionary phase of the cycle tend to be sharper
than any increase during the recovery phase.
Latin America (selected countries): amplitude of expansions and contractions of the cycle of
public investment in infrastructure, 1980-2010 (yearly data)
40
34.7
32.3
28.1
25.6
24.2
Percentages
20
0
Expansion
-20
-23.8
-40
-33.1
-35.6
-51.5
-60
-58.0
-80
Total sector
Power sector
Source: Financing For Development Division (2013)
Roads and Railways
Telecommunications
Water and Anitation
Contraction
Jointly with the stylized cycle dynamics, the evidence linking short to
long run performance may explain why Latin America and the
Caribbean have lagged behind other developing regions
Trend GDP for Latin America and the Caribbean and East Asia and the Pacific,
1960-2010 (Annual logarithmic data)
3.39
Logarithmic Scale
3.37
Period I
1960-1981
3.35
3.33
3.31
Period II
1981-2010
3.29
3.27
3.25
East Asia and the Pacific
Source: ECLAC (2012)
Latin America and the Caribbean
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
3.23
Conclusions
• The analysis using a sample of 83 countries worldwide and two cycle
methodologies shows that:
 First and most importantly, Latam register weaker expansions, both in terms of
duration and intensity, than those of other regions and in particular than those of
the East Asian and Pacific region.
 The most recent expansion (2003-2007) which is by far one of the most
intense in the history of the region corroborates the result that expansions
are weaker in Latam with respect to other regions.
 A second distinctive feature is that Latin America and then Caribbean’s
contractions conform in terms of duration and amplitude to those of the rest of
the world.
• The specificities of the cycle are not only relevant to the short-run.
• They are also reflected in the behavior of variables such as productivity
and investment which are linked to long-run growth performance.
These findings open important avenues to further explore and analyze the
short and long-term performance of Latin America and Caribbean economies
• Cycle analysis should increase its focus on the nature and behavior
of expansions.
 Contractions tend to be somewhat homogeneous across regions in terms
of duration and amplitude. Contrarily, expansions are heterogeneous in
terms of both indicators.
 Improving our knowledge of the differences in the expansionary dynamics
of countries and regions, can further our understanding of the differences
in their rates of growth and levels of development.
• The management of the cycle affects the short-run fluctuations of
economic activity and hence volatility. But in addition, it is not trend
neutral.
 Hence, the effects of aggregate demand management policies may be
more persistent over time and less transitory than currently thought.