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

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collection.link.137
https://openknowledge.worldbank.org/handle/10986/6002
collection.link.215
https://openknowledge.worldbank.org/handle/10986/11883
collection.name.137
Spanish PDFs Available
collection.name.215
LAC Semiannual Report
dc.contributor.author
Vegh, Carlos A.
dc.contributor.author
Morano, Luis
dc.contributor.author
Friedheim, Diego
dc.contributor.author
Rojas, Diego
dc.date.accessioned
2017-10-04T22:09:56Z
dc.date.available
2017-10-04T22:09:56Z
dc.date.issued
2017-10-11
dc.description.abstract
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).
en
dc.identifier.isbn
978-1-4648-1217-0
dc.identifier.uri
http://hdl.handle.net/10986/28443
dc.language
English
dc.language.iso
en_US
dc.publisher
Washington, DC: World Bank
dc.relation.ispartofseries
LAC Semiannual Report;October 2017
dc.rights
CC BY 3.0 IGO
dc.rights.holder
World Bank
dc.rights.uri
http://creativecommons.org/licenses/by/3.0/igo
dc.subject
GROWTH
dc.subject
HOUSEHOLD INCOME INEQUALITY
dc.subject
LABOR FORCE PARTICIPATION
dc.subject
LABOR INCOME INEQUALITY
dc.subject
SLOWDOWN
dc.subject
ELASTICITY
dc.subject
INEQUALITY
dc.subject
TERMS OF TRADE
dc.subject
UNEMPLOYMENT
dc.title
Between a Rock and a Hard Place
en
dc.title.subtitle
The Monetary Policy Dilemma in Latin America and the Caribbean
en
dc.type
Serial
en
okr.date.disclosure
2017-10-11
okr.doctype
Publications & Research
okr.doctype
Publications & Research :: Publication
okr.googlescholar.linkpresent
yes
okr.identifier.doi
10.1596/978-1-4648-1217-0
okr.identifier.internaldocumentum
211217
okr.identifier.report
121779
okr.imported
true
okr.language.supported
en
okr.region.administrative
Latin America & Caribbean
okr.region.geographical
Caribbean
okr.region.geographical
Central America
okr.region.geographical
Latin America
okr.topic
Finance and Financial Sector Development :: Access to Finance
okr.topic
Macroeconomics and Economic Growth :: Economic Forecasting
okr.topic
Macroeconomics and Economic Growth :: Economic Growth
okr.topic
Poverty Reduction :: Achieving Shared Growth
okr.topic
Social Protections and Labor :: Labor Markets
okr.unit
LCRCE

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