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The Road to Redemption: Policy Response to Crises in Latin America

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  • Carlos A Vegh
  • Guillermo Vuletin

Abstract

This paper analyzes the fiscal and monetary policy responses to crises in Latin America over the last 40 years. We argue that, on average, Latin American countries have “graduated” in terms of their policy responses in the sense that they have been able to switch from procyclical to counteryclical policy responses. This average response, however, masks a great deal of heterogeneity with some countries (such as Chile, Brazil, and Mexico) leading the graduation process and others (like Argentina and Venezuela) still showing procyclical policy responses. We further argue that countercyclical policy responses have been effective in reducing the duration and intensity of crises. Finally, we relate our analysis to the current crisis in the Eurozone and argue that, like in many instances in Latin America, procyclical fiscal policy has aggravated the duration and intensity of the crisis.

Suggested Citation

  • Carlos A Vegh & Guillermo Vuletin, 2014. "The Road to Redemption: Policy Response to Crises in Latin America," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(4), pages 526-568, November.
  • Handle: RePEc:pal:imfecr:v:62:y:2014:i:4:p:526-568
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    1. Riera-Crichton, Daniel & Vegh, Carlos A. & Vuletin, Guillermo, 2015. "Procyclical and countercyclical fiscal multipliers: Evidence from OECD countries," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 15-31.
    2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters,in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82 National Bureau of Economic Research, Inc.
    3. Rudiger Dornbusch & Sebastian Edwards, 1991. "The Macroeconomics of Populism in Latin America," NBER Books, National Bureau of Economic Research, Inc, number dorn91-1, December.
    4. Nakata, Taisuke, 2016. "Optimal fiscal and monetary policy with occasionally binding zero bound constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 220-240.
    5. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    6. Calvo, Guillermo A. & Mendoza, Enrique G., 1996. "Mexico's balance-of-payments crisis: a chronicle of a death foretold," Journal of International Economics, Elsevier, vol. 41(3-4), pages 235-264, November.
    7. Kaminsky, Graciela L. & Reinhart, Carmen M., 2000. "On crises, contagion, and confusion," Journal of International Economics, Elsevier, vol. 51(1), pages 145-168, June.
    8. Carlos A. Vegh & Guillermo Vuletin, 2013. "Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets," World Scientific Book Chapters,in: The Role of Central Banks in Financial Stability How Has It Changed?, chapter 6, pages 105-129 World Scientific Publishing Co. Pte. Ltd..
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    15. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2003. "The Unholy Trinity of Financial Contagion," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 51-74, Fall.
    16. Ortiz, Alberto & Pablo, Ottonello & Sturzenegger, Federico & Talvi, Ernesto, 2007. "Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter?," Working Paper Series rwp07-057, Harvard University, John F. Kennedy School of Government.
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    24. Didier, Tatiana & Hevia, Constantino & Schmukler, Sergio L., 2012. "How resilient and countercyclical were emerging economies during the global financial crisis?," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2052-2077.
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    Citations

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    Cited by:

    1. Julia Ruiz Pozuelo & Amy Slipowitz & Guillermo Vuletin, 2016. "Democracy Does Not Cause Growth: The Importance of Endogeneity Arguments," IDB Publications (Working Papers) 95018, Inter-American Development Bank.
    2. Riera-Crichton, Daniel & Vegh, Carlos A. & Vuletin, Guillermo, 2015. "Procyclical and countercyclical fiscal multipliers: Evidence from OECD countries," Journal of International Money and Finance, Elsevier, vol. 52(C), pages 15-31.
    3. Barry Eichengreen & Poonam Gupta, 2018. "Managing Sudden Stops," Central Banking, Analysis, and Economic Policies Book Series,in: Enrique G. Mendoza & Ernesto Pastén & Diego Saravia (ed.), Monetary Policy and Global Spillovers: Mechanisms, Effects and Policy Measures, edition 1, volume 25, chapter 2, pages 009-047 Central Bank of Chile.
    4. Carlos Vegh & Daniel Lederman & Federico R. Bennett, "undated". "Leaning Against the Wind," World Bank Other Operational Studies 26364, The World Bank.
    5. Carlos A. Vegh & Luis Morano & Diego Friedheim & Diego Rojas, "undated". "Between a Rock and a Hard Place," World Bank Other Operational Studies 28443, The World Bank.
    6. Julia Ruiz Pozuelo & Amy Slipowitz & Guillermo Vuletin, 2016. "Democracy Does Not Cause Growth: The Importance of Endogeneity Arguments," IDB Publications (Working Papers) 7758, Inter-American Development Bank.
    7. Diniz, André, 2016. "Effects of fiscal consolidations in Latin America," Textos para discussão 423, FGV/EESP - Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    8. Combes, Jean-Louis & Minea, Alexandru & Sow, Moussé, 2017. "Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules," Economic Modelling, Elsevier, vol. 65(C), pages 138-146.
    9. Pablo Hernández de Cos & Enrique Moral-Benito, 2016. "Fiscal multipliers in turbulent times: the case of Spain," Empirical Economics, Springer, vol. 50(4), pages 1589-1625, June.
    10. Enrique Alberola & Iván Kataryniuk & Ángel Melguizo & René Orozco, 2016. "Fiscal policy and the cycle in Latin America: the role of financing conditions and fiscal rules," Working Papers 1604, Banco de España;Working Papers Homepage.
    11. repec:chb:bcchec:v:20:y:2017:i:2:p:004-041 is not listed on IDEAS

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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