Integration, Interdependence, and Regional Goods: An Application to Mercosur

Abstract

The paper is organized as follows. The next section presents some stylized facts on Mercosur, documenting the evolution of trade in goods within member countries and then highlighting the characteristics of the trade agreement that make smaller Mercosur economies vulnerable to macroeconomic developments in Brazil. The subsequent section presents the main empirical contribution of the paper. Specifically, we develop empirical definitions of regional goods and then measure the extent of trade in regional goods by estimating intraregional trade in services, identifying the commodity items that can relatively easily find alternative markets, and calculating three alternative indicators of export exposure. The following section formally incorporates the concept of regional goods into a model of an intertemporal open economy. This model is used to assess Afonso Bevilaqua, Marcelo Catena, and Ernesto Talvi 159 the main channels of the transmission of shocks to the price of regional goods, to perform sensitivity analysis to ascertain the main factors behind vulnerability, and to set the stage for meaningful policy discussions. In the final section, we discuss the policy implications.