Crisis Response in Latin America: Is the "Rainy Day" at Hand?

46 Pages Posted: 25 Apr 2011

See all articles by Eduardo Fernandez-Arias

Eduardo Fernandez-Arias

Inter-American Development Bank (IDB)

Peter J. Montiel

Williams College - Department of Economics

Date Written: June 2009

Abstract

This paper examines the countercyclical policy options available to Latin American countries in the face of the current global economic crisis, concluding that most of the major countries in the region appear to possess the fiscal space (as measured by credible fiscal sustainability and debt headroom) to run prudent countercyclical fiscal deficits. Those countries should undertake a constrained fiscal expansion focused on productive public spending and financed by “rainy day” funds—large stocks of foreign exchange reserves that they have accumulated during recent years—rather than by market borrowing. The recent surge in multilateral financial activity to alleviate market illiquidity, whether intended for reserve or budget support, strengthens the case for this policy prescription: with multilateral support, the appropriate policy response is more expansionary, and its financing is less reliant on market borrowing.

Suggested Citation

Fernandez-Arias, Eduardo and Montiel, Peter J., Crisis Response in Latin America: Is the "Rainy Day" at Hand? (June 2009). IDB Working Paper No. 571, Available at SSRN: https://ssrn.com/abstract=1821922 or http://dx.doi.org/10.2139/ssrn.1821922

Eduardo Fernandez-Arias (Contact Author)

Inter-American Development Bank (IDB) ( email )

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Peter J. Montiel

Williams College - Department of Economics ( email )

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HOME PAGE: http://www.williams.edu/Economics/faculty/montiel.htm

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