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.
|Date of creation:||Jul 2010|
|Date of revision:|
|Publication status:||Published in Contemporary Economic Policy, no. doi: 10.1111/j.1465-7287.2010.00244.x|
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- Eduardo Fernández-Arias & Peter J. Montiel, 2009.
"Crisis Response in Latin America: Is the "Rainy Day" at Hand?,"
IDB Publications (Working Papers)
6769, Inter-American Development Bank.
- 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.
- Guillermo A. Calvo & Carmen M. Reinhart, 2002.
"Fear of Floating,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 117(2), pages 379-408.
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