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Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter?

  • Ortiz, Alberto

    (Boston U)

  • Pablo, Ottonello

    (Ceres)

  • Sturzenegger, Federico

    (Harvard University and Universidad Torcuato Di Tella)

  • Talvi, Ernesto

    (Ceres)

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 strenghtening fiscal results during expansions.

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File URL: https://research.hks.harvard.edu/publications/workingpapers/citation.aspx?PubId=5164&type=WPN
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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp07-057.

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Date of creation: Nov 2007
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Handle: RePEc:ecl:harjfk:rwp07-057
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  1. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia.
  2. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
  3. Alejandro Izquierdo & Ernesto Talvi & Guillermo A Calvo, 2006. "Phoenix miracles in emerging markets: recovering without credit from systemic financial crises," BIS Working Papers 221, Bank for International Settlements.
  4. Francesco Caselli & James Feyrer, 2007. "The Marginal Product of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 535-568.
  5. Guillermo A. Calvo & Alejandro Izquierdo & Rudy Loo-Kung, 2005. "Relative Price Volatility Under Sudden Stops: The Relevance of Balance Sheet Effects," NBER Working Papers 11492, National Bureau of Economic Research, Inc.
  6. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  7. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
  8. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  9. Robert P. Hagemann, 1999. "The Structural Budget Balance The IMF’s Methodology," IMF Working Papers 99/95, International Monetary Fund.
  10. Alberto Ortiz & Federico Sturzenegger, 2007. "Estimating Sarb'S Policy Reaction Rule," South African Journal of Economics, Economic Society of South Africa, vol. 75(4), pages 659-680, December.
  11. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications (Working Papers) 6467, Inter-American Development Bank.
  12. Braggion, Fabio & Christiano, Lawrence J. & Roldos, Jorge, 2009. "Optimal monetary policy in a [`]sudden stop'," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 582-595, May.
  13. Claude Giorno & Pete Richardson & Deborah Roseveare & Paul van den Noord, 1995. "Estimating Potential Output, Output Gaps and Structural Budget Balances," OECD Economics Department Working Papers 152, OECD Publishing.
  14. Marcel, Mario & Tokman R., Marcelo & Valdés, Rodrigo O. & Benavides, Paula, 2003. "Structural budget balance: methodology and estimation for the Chilean central government 1987-2001," Seminarios y Conferencias 6573, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
  15. Guillermo A. Calvo & Ernesto Talvi, 2005. "Sudden Stop, Financial Factors and Economic Collpase in Latin America: Learning from Argentina and Chile," NBER Working Papers 11153, National Bureau of Economic Research, Inc.
  16. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
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