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The Great Recession, 'Rainy Day' Funds, and Countercyclical Fiscal Policy in Latin America

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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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File URL: http://web.williams.edu/Economics/wp/MontielGreatRecession.pdf
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Bibliographic Info

Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2010-17.

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Length: 36 pages
Date of creation: Jul 2010
Date of revision:
Publication status: Published in Contemporary Economic Policy, Vol. 29, No. 3 (July 2011)
Handle: RePEc:wil:wileco:2010-17

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Keywords: countercyclical policy; fiscal space; international reserves; multilateral financial support;

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  1. 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. Eduardo Fernández Arias & Eduardo Levy-Yeyati, 2010. "Global Financial Safety Nets: Where Do We Go from Here?," Business School Working Papers 2010-06, Universidad Torcuato Di Tella.

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