Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter?
Dealing with an International Credit Crunch, Policy Responses to Sudden Stops in Latin America, 2009
54 Pages Posted: 21 Jun 2012
Date Written: 2009
In this paper we ask whether tighter monetary and fiscal policies are the right way to face a sudden stop (a sudden curtailment in capital flows) in a typical emerging economy. We develop exogenous measures of fiscal and monetary policy response and conclude that tighter policies are associated to larger falls in output. The conclusion of the analysis is not so much that macro policies should be relaxed upon a crisis, but that countries should prepare themselves by creating the conditions to be able to act countercyclically upon such events. This entails among other things reducing balance sheet mismatches or strengthening fiscal results during expansions.
Keywords: Sudden Stop, Fiscal Policy, Monetary Policy, Structural Fiscal Balance, Bayesian Estimation
JEL Classification: C11, E52, E63, F32
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