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The Great Recession, “Rainy Day” Funds, And Countercyclical Fiscal Policy In Latin America

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  • EDUARDO FERNÁNDEZ‐ARIAS
  • PETER MONTIEL

Abstract

This paper examines the fiscal policy options that were available to Latin American countries at the onset of the current global economic crisis. It concludes that most of the major countries in the region possessed the fiscal space (as measured by credible fiscal sustainability and debt headroom) to run prudent countercyclical fiscal deficits. For those countries, the appropriate policy response involved a constrained fiscal expansion focused on productive public spending and financed by drawing on the “rainy day” funds - in the form of large stocks of foreign exchange reserves - that they accumulated in prior years, rather than by market borrowing. It shows that 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.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

Volume (Year): 29 (2011)
Issue (Month): 3 (07)
Pages: 304-322

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Handle: RePEc:bla:coecpo:v:29:y:2011:i:3:p:304-322

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  1. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  2. Eduardo Fernandez-Arias & Peter Montiel, 2009. "Crisis Response in Latin America: Is the "Rainy Day" at Hand?," Research Department Publications 4628, Inter-American Development Bank, Research Department.
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Cited by:
  1. Muhammad-Bashir Owolabi Yusuf & Gairuzazmi Mat Ghani & Ahamed Kameel Mydin Meera, 2013. "The Challenges of Implementing Gold Dinar in Kelantan: An Empirical Analysis," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 5(3), pages 97-114, October.

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