Changes in growth volatility in MERCOSUR countries: Is there evidence of decoupling of the Uruguayan economy?

This paper explores the existence of structural changes in the cycle volatility of economic growth of the MERCOSUR countries between 1980 and 2019 and explores the hypothesis of the decoupling of the Uruguayan economy. The empirical analysis follows the procedures originally applied in McConell & Pérex-Quiroz (2000) and Stock & Watson (2002; 2003). The results show that Brazil has a break in cycle volatility in the mid-1990s, Argentina shows a structural break in the year 2010, and Uruguay presents a structural break after the economic crisis of 2002. Both in Uruguay and Brazil, cyclical volatility reduced by about 50% in the pre-and post-bust periods. Meanwhile, in Argentina the reduction on volatility is less significant. Focusing on the case of Uruguay, results show that even controlling for external and regional volatility breaks remain. These results rule out that the observed reduction in volatility responds exclusively to a less unstable external context (“good luck hypothesis") in the case of one of the smaller MERCOSUR countries.