WASHINGTON, United States (CMC) – An International Monetary Fund (IMF) Working Paper has confirmed that Caribbean countries are highly exposed to external factors.

Using data from 1980 to 2017, the paper, “The Caribbean and Its Linkages with the World: A GVAR Model Approach,” says that a fall in oil prices and an increase in the US gross domestic product (GDP), as examples, have a “positive and large impact” on most Caribbean countries after controlling for financial variables, exchange rate fluctuations and overall price changes.

The paper uses a Global Vector Auto-regressive (GVAR) model tailored for the Caribbean region, which includes its major trading partners, representing altogether around 60 per cent of the global economy.

“We provide stylized facts of the main interrelations between the Caribbean region and the rest of the world, and then we quantify the impact of external shocks on Caribbean countries through the application of two case studies: A change in the international price of oil, and an increase in the US GDP,” say the authors Mauricio Vargas and Daniela Hess.

“The results from the model help to disentangle effects from various channels that interact at the same time, such as flows of tourists, trade of goods, and changes in economic conditions in the largest economies of the globe,” they add.

The report says that global spill-overs are a central element in international economics and that Caribbean countries are “as acutely exposed to them as many others”.

It says that production and trade in goods and services, and financial flows depend not only on internal market supply and demand forces but also on competitiveness and world growth.

During the past decades, the paper notes, many small and large countries have leaned towards trade openness and financial liberalisation, stating that some evidence suggests that this might benefit their economies.

Notwithstanding, the paper says a strong degree of integration poses additional risks to small open economies that may suffer disproportionately from shifting economic conditions in the largest economies of the globe, “as they are less able to diversify away from the sectors in which they have comparative advantages”.

“That is the case for most Caribbean countries, which are highly internationally integrated, especially through tourism flows – a sector often hit hard by downturns in larger economies,” the paper says.

To quantify the strength of macroeconomic linkages between Caribbean countries and the rest of the world, the paper introduces a Caribbean-tailored GVAR model.

The IMF GVAR model features 45 developing, emerging market and advanced economies, of which 15 are Caribbean.

The analysis focuses on specific spill-overs for Caribbean countries, such as the effect of an expansionary policy in the United States or an oil price drop.

The paper says one of the main advantages of implementing a GVAR model to assess macroeconomic impacts of external shocks is that “it allows to internalise second round effects that are usually considered as exogenous or static in less sophisticated models”.

The IMF Working Paper says measuring linkages between different regions of the globe is a challenge.

However, it says the GVAR methodology “shows itself to be useful to condense large amounts of information in a way that permits researchers to isolate global shocks or country-specific shocks and gauge their impact across the board”.