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

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.(This abstract was borrowed from another version of this item.)