18 To quantify the effect of external spreads shocks on output, we estimated the following multipliers<sup>2 0</sup> based on the impulse response functions (Appendix 4): In Argentina, a onestandard deviation shock has an immediate impact on growth, producing a slowdown of 3% on average that lasts about 10 months. This result is similar to that obtained by Agenor, Aizenman and Hoffmaister (1999), though their effect is more persistent (15 months) but of smaller magnitude (about 0.5% on average). In Brazil, a shock of similar magnitude implies a slowdown of 1.4%, but of greater persistence (21 months). In Mexico, a one-standard deviation shock reflects in a growth-slowdown on average of 1.6% and has an effect that lasts 18 months. In Chile, the same sized shock reduces growth by 1.1%. and its effect disappears after 15 months. In Colombia, a similar shock produces a slowdown of about 0.4% but persists around 18 months.

Domestic real interest rate shocks are a major source of output variability in Chile and Colombia. In Chile, a one-standard deviation shock to real interest rates is associated with a slowdown of 1.3% on average that lasts a bit over a year. In Colombia, a similar shock results in lower growth of 1.4% that lasts about 16 months. In Brazil a one standard deviation shock to the real interest rate is associated with lower growth of .9%21 during nine months. In Argentina, a one-percentage point shock lowers growth by about 2% during seven months. In Mexico a similar shock lowers growth by 0.6% during 17 months.

The real exchange rate shocks are the main explanatory factor of output growth variance in Brazil and Mexico. In Argentina, Chile, and Colombia it's the second or third most important factor accounting for the variance of output. In every case the impulseresponse functions shows (Appendix 4) that real exchange rate-appreciating shocks are associated with output expansions. The negative association between output growth and currency depreciation in the short run (we used a 24-month horizon) is common to previous studies abouL this topic in Latin America (Edwards, 1989; Kamin and Rogers, 1997, Ahmed, 1999)22 Terms of trade shocks are the dominant source of output variability in Ecuador, Peru and Venezuela (in the 8-16 months horizon), though, as mentioned before, a major part of the forecast error variance remains unexplained by our model in the last two countries. In

> 20 These multipliers are the average values of the impulse response functions from the moment of the shock until its persistence lasts. Appendix 4 presents the impulse response functions.

> 21 The relatively small number is due to the fact that real interest rates have a huge variability in Brazil. One standard deviation shock is a 24 percentage point shock that reduces growth in 0.9%. In Chile, a one standard deviation shock (3.4 percentage points) reduces growth by 1.3%. This comment applies to all the multipliers we are describing in this section and in Appendix 4 you can see the magnitudes of one standard deviation shocks for each series.

22 The VAR including the rate of growth of output and the real exchange rate in differences has the problem of not incorporating restrictions imposed by possible long-term relationships between the variables. Ahmed (1999) used a cointegrating VAR methodology for a different sample period and different variables, but the results are similar to those reported here. Unfortunately, our sample size and the lag-lengths we selected do not allow similar estimations, forcing us to interpret our results as applicable to the short run. Kamin-Klau (1998) proposed an alternative methodology for incorporating the long-run relationship, and for a subset of Latin American countries find that the contractionary effect does not hold in the long-run.