Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean

After a growth slowdown that lasted six years (including a contraction of 1.3 percent last year), the Latin American and Caribbean (LAC) region is finally expected to resume positive growth in 2017, with market analysts forecasting real GDP growth of 1.2 percent for 2017 and 2.3 percent for 2018. Th...

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Main Authors:	Vegh, Carlos A., Morano, Luis, Friedheim, Diego, Rojas, Diego
Format:	Serial
Language:	English en_US
Published:	Washington, DC: World Bank 2017
Subjects:	GROWTH HOUSEHOLD INCOME INEQUALITY LABOR FORCE PARTICIPATION LABOR INCOME INEQUALITY SLOWDOWN ELASTICITY INEQUALITY TERMS OF TRADE UNEMPLOYMENT
Online Access:	http://hdl.handle.net/10986/28443

id	okr-10986-28443
recordtype	oai_dc
spelling	okr-10986-284432021-04-23T14:04:48Z Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean Vegh, Carlos A. Morano, Luis Friedheim, Diego Rojas, Diego GROWTH HOUSEHOLD INCOME INEQUALITY LABOR FORCE PARTICIPATION LABOR INCOME INEQUALITY SLOWDOWN ELASTICITY INEQUALITY TERMS OF TRADE UNEMPLOYMENT After a growth slowdown that lasted six years (including a contraction of 1.3 percent last year), the Latin American and Caribbean (LAC) region is finally expected to resume positive growth in 2017, with market analysts forecasting real GDP growth of 1.2 percent for 2017 and 2.3 percent for 2018. The recovery, particularly in South America, will be led by a strong rebound in Argentina, which is expected to grow by 2.8 percent in 2017 and 3.0 percent in 2018, and Brazil, which is expected to resume positive growth as well, expanding by 0.7 percent in 2017 and 2.3 in 2018, after contracting for two consecutive years. The usual external drivers of growth (particularly commodity prices, and growth in China and U.S.) are expected to remain relatively neutral, which points to the need for the region to reinforce its own sources of growth (e.g., structural reforms, investment in infrastructure, and further international trade both within and outside the region). Unfortunately, the region finds itself in a weak fiscal situation with 28 out of 32 countries with an overall fiscal deficit, which implies that a gradual but sustained fiscal consolidation will be needed in the years ahead. The report's main focus (Chapter 2) is on the monetary policy dilemma faced by countries in LAC. When a typical commodity-exporter country in LAC is hit by, say, a negative terms of trade shock, real GDP falls, the currency depreciates, and inflation increases. The Central Bank faces the dilemma of (i) increasing policy rates to defend the currency/fight inflation, but at the cost of aggravating the recession or (ii) reducing the policy rate, thus stimulating output, but encouraging further depreciation and inflation. Traditionally, LAC countries have chosen the first option and have thus pursued procyclical monetary policy (i.e., increasing policy rates in bad times). Recently, however, many countries have been able to switch and become countercyclical (i.e., reducing policy rates in bad times), which enables them to prop up the economy in recessionary times (which is particularly important when lack of fiscal space precludes countercyclical fiscal policy). 2017-10-04T22:09:56Z 2017-10-04T22:09:56Z 2017-10-11 Serial 978-1-4648-1217-0 http://hdl.handle.net/10986/28443 English en_US LAC Semiannual Report;October 2017 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo World Bank Washington, DC: World Bank Publications & Research Publications & Research :: Publication Latin America & Caribbean Caribbean Central America Latin America
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	GROWTH HOUSEHOLD INCOME INEQUALITY LABOR FORCE PARTICIPATION LABOR INCOME INEQUALITY SLOWDOWN ELASTICITY INEQUALITY TERMS OF TRADE UNEMPLOYMENT
spellingShingle	GROWTH HOUSEHOLD INCOME INEQUALITY LABOR FORCE PARTICIPATION LABOR INCOME INEQUALITY SLOWDOWN ELASTICITY INEQUALITY TERMS OF TRADE UNEMPLOYMENT Vegh, Carlos A. Morano, Luis Friedheim, Diego Rojas, Diego Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean
geographic_facet	Latin America & Caribbean Caribbean Central America Latin America
relation	LAC Semiannual Report;October 2017
description	After a growth slowdown that lasted six years (including a contraction of 1.3 percent last year), the Latin American and Caribbean (LAC) region is finally expected to resume positive growth in 2017, with market analysts forecasting real GDP growth of 1.2 percent for 2017 and 2.3 percent for 2018. The recovery, particularly in South America, will be led by a strong rebound in Argentina, which is expected to grow by 2.8 percent in 2017 and 3.0 percent in 2018, and Brazil, which is expected to resume positive growth as well, expanding by 0.7 percent in 2017 and 2.3 in 2018, after contracting for two consecutive years. The usual external drivers of growth (particularly commodity prices, and growth in China and U.S.) are expected to remain relatively neutral, which points to the need for the region to reinforce its own sources of growth (e.g., structural reforms, investment in infrastructure, and further international trade both within and outside the region). Unfortunately, the region finds itself in a weak fiscal situation with 28 out of 32 countries with an overall fiscal deficit, which implies that a gradual but sustained fiscal consolidation will be needed in the years ahead. The report's main focus (Chapter 2) is on the monetary policy dilemma faced by countries in LAC. When a typical commodity-exporter country in LAC is hit by, say, a negative terms of trade shock, real GDP falls, the currency depreciates, and inflation increases. The Central Bank faces the dilemma of (i) increasing policy rates to defend the currency/fight inflation, but at the cost of aggravating the recession or (ii) reducing the policy rate, thus stimulating output, but encouraging further depreciation and inflation. Traditionally, LAC countries have chosen the first option and have thus pursued procyclical monetary policy (i.e., increasing policy rates in bad times). Recently, however, many countries have been able to switch and become countercyclical (i.e., reducing policy rates in bad times), which enables them to prop up the economy in recessionary times (which is particularly important when lack of fiscal space precludes countercyclical fiscal policy).
format	Serial
author	Vegh, Carlos A. Morano, Luis Friedheim, Diego Rojas, Diego
author_facet	Vegh, Carlos A. Morano, Luis Friedheim, Diego Rojas, Diego
author_sort	Vegh, Carlos A.
title	Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean
title_short	Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean
title_full	Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean
title_fullStr	Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean
title_full_unstemmed	Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean
title_sort	between a rock and a hard place : the monetary policy dilemma in latin america and the caribbean
publisher	Washington, DC: World Bank
publishDate	2017
url	http://hdl.handle.net/10986/28443
_version_	1764466920540602368

Between a Rock and a Hard Place : The Monetary Policy Dilemma in Latin America and the Caribbean

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