Macroeconomic Volatility in Latin America: A Conceptual Framework and Three Case Studies

Abstract

After decades of trial, error, and occasional regress the pieces of a successful Latin American economic model can be seen scattered among the leading economies of the region. The most traditional macroeconomic maladies of the emerging world - such as chronic fiscal imbalances and monetary gimmicks are gradually being left behind. Many of these economies have made significant progress in their regulatory and supervisory frameworks and, at times, have been leaders beyond Latin American boundaries in allowing private sector co-participation in a wide array of ex-public sector activities. Despite these significant efforts, several structural sources of volatility remain, and new ones have emerged as a result of the new and otherwise better economic environment. In this paper I review these sources through the recent experiences of Argentina, Chile and Mexico.The paper is based on three case studies -Argentina,Chile and México- whose combined experiences illustrate the central dilemmas faced by emerging economies. While embodied differently in each country, two common factors clearly lie behind structural volatility: weak international financial links and a still-limited development of domestic financial markets, particularly for small and medium-size firms. Once they start interacting, these two ingredients not only create volatility, but also generate externalities that require policy intervention.