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The Great Recession, 'Rainy Day' Funds, and Countercyclical Fiscal Policy in Latin America

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Abstract

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.

Suggested Citation

  • Eduardo Fernández-Arias & Peter Montiel, 2010. "The Great Recession, 'Rainy Day' Funds, and Countercyclical Fiscal Policy in Latin America," Department of Economics Working Papers 2010-15, Department of Economics, Williams College.
  • Handle: RePEc:wil:wileco:2010-15
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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
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    4. Mr. Jeromin Zettelmeyer & Ivanna Vladkova Hollar, 2008. "Fiscal Positions in Latin America: Have They Really Improved?," IMF Working Papers 2008/137, International Monetary Fund.
    5. Fernández-Arias, Eduardo & Montiel, Peter J., 2009. "Crisis Response in Latin America: Is the "Rainy Day" at Hand?," IDB Publications (Working Papers) 1652, Inter-American Development Bank.
    6. Treisman, Daniel, 2000. "The causes of corruption: a cross-national study," Journal of Public Economics, Elsevier, vol. 76(3), pages 399-457, June.
    7. Cesar Calderón & Pablo Fajnzylber, 2009. "How Much Room Does Latin America and the Caribbean Have for Implementing Counter-Cyclical Fiscal Policies?," World Bank Publications - Reports 10988, The World Bank Group.
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    Cited by:

    1. Bruno Martorano, 2014. "Pre-crisis Conditions and Government Policy Responses: Chile and Mexico during the Great Recession," Papers inwopa729, Innocenti Working Papers.
    2. Muhammad-Bashir Owolabi Yusuf & Gairuzazmi Mat Ghani & Ahamed Kameel Mydin Meera, 2013. "The Challenges of Implementing Gold Dinar in Kelantan: An Empirical Analysis," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 5(3), pages 97-114, October.
    3. Xiuping Ji & Feiran Dong & Chen Zheng & Naipeng Bu, 2022. "The Influences of International Trade on Sustainable Economic Growth: An Economic Policy Perspective," Sustainability, MDPI, vol. 14(5), pages 1-15, February.
    4. Borensztein, Eduardo & Castilleja Vargas, Liliana & Hernaiz, Daniel & Rasteletti, Alejandro, 2012. "International Crises and Policy Responses in the Southern Cone," IDB Publications (Working Papers) 4189, Inter-American Development Bank.

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    More about this item

    Keywords

    countercyclical policy; fiscal space; international reserves; multilateral financial support;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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