The Road to Redemption: Policy Response to Crises in Latin America
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.
Paper prepared for the 2013 IMF Annual Research Conference in honor of Stanley Fischer's 70th birthday. We are extremely grateful to Julia Ruiz Pozuelo and Collin Rabe for research assistance. On a personal note, Vegh owes a huge debt of gratitude to Stan for 20 years of unwavering mentorship, co-authorship, and support (dating back to Stan's arrival at the IMF in September 1994). Stan is one of those rare individuals who combines truly remarkable professional credentials with equally astounding personal qualities. Our profuse thanks to Vittorio Corbo as well as to two referees and the editors of this Journal for extremely helpful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Carlos A Vegh & Guillermo Vuletin, 2014. "The Road to Redemption: Policy Response to Crises in Latin America," IMF Economic Review, Palgrave Macmillan, vol. 62(4), pages 526-568, November. citation courtesy of