This Selected Issues paper analyzes the spillover effects of key external shocks on Paraguay. It presents an overview of Paraguay’s major economic and financial linkages with the rest world, and quantifies the spillover effects of key external factors on the Paraguayan economy, using a vector autoregression approach. The empirical results suggest that global shocks have a significant impact on Paraguay’s growth rate. The paper also highlights that output and exchange rate shocks stemming from Brazil and Argentina are also important, even after controlling for global factors.
On May 1, 2009 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Paraguay. 1 Background The Paraguayan economy performed very well over the past five years, with real GDP growth averaging about 5 percent a year—the best in a generation. The fiscal position strengthened considerably, thereby reducing public debt sharply to relatively low levels. The economy grew by nearly 6 percent in 2008, but growth decelerated in the last quarter of the year. Paraguay’s macroeconomic outlook has been negatively
contracting GDP will result in an overall fiscal deficit of 2½ percent of GDP. Executive Board Assessment Directors noted that the Paraguayan economy is projected to contract this year as a result of a severe drought. However, a rapid turnaround in activity and strong growth next year are expected, on account of robust domestic demand, strong confidence, and normalization of weather conditions. Directors agreed that the current mix of macroeconomic policies is appropriately supportive of economic activity and consistent with the inflation target in 2012. Noting