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Do middle-income countries continue to have the ability to deal with the global financial crisis ?

Listed author(s):
  • van Doorn, Ralph
  • Suri, Vivek
  • Gooptu, Sudarshan

This paper introduces an"index of macroeconomic space"-- demonstrating the ability of acountry to run a countercyclical fiscal policy or a fiscal stimulus at any point in time -- to show how a sample of 20 mostly middle-income countries had entered the 2008 global financial crisis with different initial conditions that, in turn, determined their ability to respond to this crisis. Since 2008, many have implemented expansionary fiscal policies and have used up available macroeconomic space. Most have had to resort to increased borrowing by the public sector, both externally and domestically. Can the middle-income countries restore their pre-2008 macroeconomic space (to the level given by historical averages of key macroeconomic variables) or contain it from further deterioration in the medium term? In an endeavor to address this question, this paper shows, through illustrative scenarios, that the room to maneuver for some countries is somewhat limited unless they embark on severe, unprecedented fiscal adjustments or they may need more time to do so than current projections seem to suggest.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5381.

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Date of creation: 01 Jul 2010
Handle: RePEc:wbk:wbrwps:5381
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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2011. "From Financial Crash to Debt Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 1676-1706, August.
  2. Petia Topalova & Dan Nyberg, 2010. "What Level of Public Debt Could India Target?," IMF Working Papers 10/7, International Monetary Fund.
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