Date of Award

8-1-2011

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Sharma, Subhash

Abstract

With the fast pace of globalization, interdependence among economies is accelerating across the globe. Consequently, the economic and financial linkages between countries around the world are deepening more and more. Similarly, economic cooperation and policy coordination have been guiding principles to the policy makers, financial agents, and trade partners alike. Information flows from one corner of the world to another just in the blink of an eye. A small disturbance in USA for instance can create ripples and tides at the same time all over the world. The European integration has been a successful and an iconic example of economic integration in other regions. This dissertation consists of three essays. The first essay investigates the transmission of US and Euro area shocks to emerging market economies by analyzing their influences on real and monetary sectors. Using the variance decomposition and impulse response function approach we find that the influence of US and Euro area real and monetary shocks varies from country to country. We do not find any evidence of clear dominant of US or Euro shocks in explaining the forecast error variance of any variables in any of the emerging economies considered in this study. Our findings indicate that both real and monetary shocks are influential to emerging economies in all three continents. The analysis of impulse response functions shows that there are cross country variation in responding to those shocks among the countries. The second essay investigates the feasibility of economic integration in Latin America by considering the seven largest economies in the region i.e. Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. We hypothesize that if these largest economies in the region are integrated then the smaller economies will follow the suit. Towards this goal we analyze the long-term and short-term relationship among key macro variables--real GDP, intra-regional trade, private investment and consumption in these seven countries. We observe that the economic fluctuations in these countries follow a similar pattern in terms of duration, intensity and timing both in the long and the short run. Our results suggest that since these countries demonstrate a high degree of co-movement among key macro variables Latin America can lead the path of integration process in the region and reap the benefits of economic integration. The third essay examines the role of exchange rates dynamics in Latin American countries considered in the second essay. By employing multivariate trend-cycle decomposition methodology we find strong co-movement among the currency exchange rates of Argentine peso, Brazilian real, Chilean peso, Colombian peso, Mexican peso, Peruvian sol, and Venezuelan bolivar. We find the evidence of high degree of comovement in the currency exchange rates of Latin both in the short-run and long run provide adequate grounds for monetary policy coordination. Our results further imply that the financial markets in the region are integrated and Latin American countries appear to be one bloc in having common shocks and reacting to those shocks in coordination. Despite the synchronous behavior both in the long-run and short-run, our results reveal that there is a bilateral difference between Argentina and Venezuela, and the rest of the Latin American countries considered in this study. Our results unveil further coordination requirements to have a greater financial integration.

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