Turmoil in Latin America and the Caribbean: Volatility, Spillovers, and Contagion (World Bank Working Papers)

Since June 2002, there has been an increase in the level and volatility of spreads along with pressures in the foreign-exchange markets across Latin America and Caribbean (LAC) region. These have been accompanied by political changes and greater political uncertainty in some countries. Countries such as Uruguay, Paraguay, and Bolivia have been facing losses of deposits and reserves of varying degrees of intensity. This report analyzes potential contagion and spillover effects of the Argentine crisis from other sources of market volatility. The report also examines the impact of the crisis on foreign direct investment flows as an indicator of potentially long-lasting harmful effects on capital flows to the LAC region. Finally, the paper assesses the impact of the Argentina crisis on individual countries in terms of trade and/or financial links.