Working Paper: NBER ID: w20675
Authors: 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 show 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 increased the duration and intensity of the crisis.
Keywords: Fiscal Policy; Monetary Policy; Crisis Management; Latin America
JEL Codes: E52; E62; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Countercyclical policies (E63) | Reduced duration and intensity of crises (H12) |
| Procyclical fiscal policies (E62) | Increased duration and intensity of eurozone crisis (F65) |
| Initial economic conditions (N11) | Effectiveness of policy responses (F68) |
| External shocks (F69) | GDP crises (F44) |
| Cyclicality of fiscal policy (E62) | Crisis duration (H12) |
| Latin American countries' shift from procyclical to countercyclical policies (N16) | Crisis severity (H12) |