Why Didn't the Global Financial Crisis Hit Latin America?

54 Pages Posted: 25 Oct 2011

See all articles by Tjeerd M. Boonman

Tjeerd M. Boonman

Banco de Mexico - Financial Stability Division

Jan P. A. M. Jacobs

University of Groningen - Faculty of Economics and Business

Gerard H. Kuper

University of Groningen - Faculty of Economics and Business

Date Written: October 24, 2011

Abstract

Latin America has a rich history of financial crises. However, it was relatively unharmed by the 2007-2009 Global Financial Crisis (GFC). This paper investigates why, and in particular the role of commodity prices and its institutional framework - in line with the fourth generation financial crisis model. We set up Early Warning Systems (EWS) for Argentina, Brazil and Mexico. These consist of an ordered logit model for currency crises for the period 1990-2007 with a dynamic factor model to deal with the large number of explanatory variables. We present forecasts for the period 2008-2009.

We find that international indicators play an important role in explaining currency crises in Mexico, while banking indicators and commodities explain the currency crisis in Argentina and Brazil. Furthermore, debt and domestic economy indicators are relevant for Argentina and Mexico. Finally, we observe that currency crises in all three countries are related to institutional indicators. For none of the countries the Early Warning System would have issued an early warning for the GFC.

Keywords: Financial crises, Early Warning Systems, Latin America, dynamic factor models, ordered logit model

JEL Classification: C25, G01, N26

Suggested Citation

Boonman, Tjeerd M. and Jacobs, Jan P.A.M. and Kuper, Gerard H., Why Didn't the Global Financial Crisis Hit Latin America? (October 24, 2011). CIRANO - Scientific Publication No. 2011s-63. Available at SSRN: https://ssrn.com/abstract=1948680 or http://dx.doi.org/10.2139/ssrn.1948680

Tjeerd M. Boonman

Banco de Mexico - Financial Stability Division ( email )

Av. 5 de Mayo 18
Piso 4
Mexico City, 06059
Mexico
+52 55 5237 2000 ext 2047 (Phone)

Jan P.A.M. Jacobs (Contact Author)

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Gerard H. Kuper

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

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