All That Glitters May Not Be Gold: Debating Key Issues May 8 th, 2008 Prepared for Presentation at...

All That Glitters May Not Be Gold: All That Glitters May Not Be Gold: Debating Key IssuesDebating Key Issues


May 8May 8thth, 2008, 2008

Prepared for Presentation at the XXVII Meeting of the Latin American Network of Prepared for Presentation at the XXVII Meeting of the Latin American Network of Central Banks and Finance Ministries, IADB, Washington DC. This Presentation is Central Banks and Finance Ministries, IADB, Washington DC. This Presentation is

based on the IADB Research Department report “All That Glitters May Not Be Gold: based on the IADB Research Department report “All That Glitters May Not Be Gold: Assessing Latin America’s Recent Macroeconomic Performance”, coordinated by Assessing Latin America’s Recent Macroeconomic Performance”, coordinated by

Alejandro Izquierdo and Ernesto Talvi Alejandro Izquierdo and Ernesto Talvi

OBJECTIVES

To present a To present a regionalregional macroeconomic perspective macroeconomic perspective

-15%

-10%

-5%

0%

5%

10%

15%

Dic

-91

Dic

-92

Dic

-93

Dic

-94

Dic

-95

Dic

-96

Dic

-97

Dic

-98

Dic

-99

Dic

-00

Dic

-01

Dic

-02

Dic

-03

Dic

-04

Dic

-05

Dic

-06

Argentina

Brazil

Chile

Colombia

Mexico

Peru

Venezuela

Beginning of Current Boom

Tequila Crisis

Russian Crisis

Cumulative R2

1st PC

2nd PC

PC= Principal Component

0.42

0.64

Synchronization of Economic Fluctuations in Latin America(Real GDP, average annual growth)

OBJECTIVES

To evaluate macroeconomic performance and To evaluate macroeconomic performance and fundamentals internalizing fundamentals internalizing the impact of external the impact of external factorsfactors


External Conditions for Latin America

*World-7 includes G-3 (EU-15, Japan and USA) and EM-4 (China, India, Korea and Russia)

4.8%

World Production(World-7 GDP Index, Annual Variation,

Weighted by PPP adjusted GDP*)

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

Ma

r-0

3

Jul-0

3

Nov

-03

Ma

r-0

4

Jul-0

4

Nov

-04

Ma

r-0

5

Jul-0

5

Nov

-05

Ma

r-0

6

Jul-0

6

Nov

-06

Ma

r-0

7

Jul-0

7

Average 91-97

299

264

External Financial Conditions(EMBI spread, basis points)

100

200

300

400

500

600

700

800

900

1000

Oct

-02

Ma

r-0

3

Ago

-03

Ene

-04

Jun-

04

Nov

-04

Abr

-05

Sep

-05

Fe

b-0

6

Jul-0

6

Dic

-06

Ma

y-0

7

Oct

-07

Ma

r-0

8

984

548

EMBI+

Non-LatinEMBI

Average 91-97

200

364

Average 91-97

Average 91-97

Oil

Non-Oil

Commodity Prices(Index of Oil and Non-Oil

Commodities, Oct-02=100)

65

115

165

215

265

315

365

Oct

-02

Abr

-03

Oct

-03

Abr

-04

Oct

-04

Abr

-05

Oct

-05

Abr

-06

Oct

-06

Abr

-07

Oct

-07

OBJECTIVES

To stimulate a To stimulate a constructive policy debateconstructive policy debate

To evaluate macroeconomic performance and To evaluate macroeconomic performance and fundamentals internalizing fundamentals internalizing the impact of external the impact of external factorsfactors


Growth PerformanceGrowth Performance

LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.

03-07

Average:

5.8%

74-06

Average:

3.2%

Observed GDP Growth(LAC-7, GDP Annual Growth)

90s Boom Current BoomRussian Crisis

91-97

Average:

4.6%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1991

1993

1995

1997

1999

2001

2003

2005

2007

*Izquierdo, Romero and Talvi (2007)

Forecast for GDP: 2003 – 2006*

(LAC-7, Values in logs)

4.55

4.60

4.65

4.70

4.75

4.80

4.85

Mar

-02

Jul-0

2

Nov

-02

Mar

-03

Jul-0

3

Nov

-03

Mar

-04

Jul-0

4

Nov

-04

Mar

-05

Jul-0

5

Nov

-05

Mar

-06

Jul-0

6

GDP at long run average

growthObserved

GDP

90% confidence interval

Predicted GDP with Observed

External Factors

Growth Performance in Latin America

‘This Time Is Different’ ‘All That Glitters May Not Be Gold’

03-07

Average:

5.8%

74-06

Average:

3.2%

Growth Performance in Latin America

‘All That Glitters May Not Be Gold’

World: 5.0%

2% 3% 4% 5% 6% 7% 8% 9%

Latin America

Africa

Emerging Europe

Middle East

Ex USSR

Emerging Asia

Growth in EMs: A Comparative Perspective(Real GDP, 2003-2007 annual growth)


‘This Time Is Different’

03-07

Average:

5.8%

74-06

Average:

3.2%

Observed GDP Growth(LAC-7, GDP Annual Growth)

90s Boom Current BoomRussian Crisis

91-97

Average:

4.6%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

1991

1993

1995

1997

1999

2001

2003

2005

2007

90s Boom Russian Crisis Current Boom


0,11

0,12

0,13

0,14

0,15

0,16

0,17

0,18

1990

1992

1994

1996

1998

2000

2002

2004

2006

Investment to GDP Ratio(Private investment, constant prices, in %)

Investment in Latin America

Investment: 90’s vs. 00’s Expansion(Private investment, LAC-7, Year 0 = 100)

* Deflated by capital price indexes. The current expansion year 0 is 2002 and the 90s expansion year 0 is 1990.

95

105

115

125

135

145

155

165

175

0 1 2 3 4

Current Expansion

90s Expansion

16.5%

17.0%


90s Expansion

Current Expansion

Productivity in Latin America‘This Time Is Different’ ‘All That Glitters May Not Be Gold’

90’s Boom Russian Crisis Current Boom

Productivity: 90’s vs. 00’s Expansion(Total Factor Productivity, LAC-7, Year 0 = 100*)

99

101

103

105

107

109

111

113

0 1 2 3 4

*The current expansion year 0 is 2002 and the 90s expansion year 0 is 1990.

Annual Variation


Total Factor Productivity Index

Total Factor Productivity(1990=100 and annual variation in %)

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

1990

1992

1994

1996

1998

2000

2002

2004

2006

98

102

106

110

114

118

122

126

Pro

duct

ivity

Gro

wth

Pro

duct

ivity

Ind

ex

90-06 Average Growth: 1.0%

Productivity in Latin America‘This Time Is Different’ ‘All That Glitters May Not Be Gold’


Productivity Growth by Region(Total Factor Productivity, 1990-2006; annual rate)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Emerging Asia EmergingRegions*

AdvancedEconomies

LAC-7

* Excluding LAC and China

3.0%

1.8%

1.0%1.0%

90’s Boom Russian Crisis Current Boom

Annual Variation


Total Factor Productivity Index

Total Factor Productivity(1990=100 and annual variation in %)

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

1990

1992

1994

1996

1998

2000

2002

2004

2006

98

102

106

110

114

118

122

126

Pro

duct

ivity

Gro

wth

Pro

duct

ivity

Ind

ex

90-06 Average Growth: 1.0%

QUESTIONS FOR DISCUSSION: GROWTH PERFORMANCE

From your country’s perspective, do you consider that From your country’s perspective, do you consider that external external factorsfactors play an important role in explaining current growth play an important role in explaining current growth performance?performance?

Our evidence suggest that even if the favorable external Our evidence suggest that even if the favorable external environment persists, the effect on growth will probably environment persists, the effect on growth will probably dissipate. Do you think that external conditions have a dissipate. Do you think that external conditions have a level or level or growth effectgrowth effect on economic activity? on economic activity?

Has the trend growth rate in your country increased above its Has the trend growth rate in your country increased above its historical average?historical average? If so, can If so, can the dynamics of the dynamics of investment and investment and productivityproductivity during the current expansion support higher trend during the current expansion support higher trend growth rates in your country? growth rates in your country?

From a growth perspective, does your country fit the From a growth perspective, does your country fit the regional regional patternpattern? Why yes or why not?? Why yes or why not?

Fiscal PolicyFiscal Policy

Observed and Structural Fiscal Balances*

-4%

Chile(% of GDP)

-2%

0%

2%

4%

6%

8%

10%

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05


Russian Crisis

(Structural balances computed by applying the “Chilean Fiscal Rule” to other LAC-7 countries)

Structural

Observed


Fiscal balances include: Public Sector (Mexico), Non-Financial Public Sector (Argentina, Colombia, Peru), General Government (Brazil), Central Government (Chile, Venezuela).

Latin America(LAC-7, % of GDP)


Russian Crisis

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

**Izquierdo, Ottonello and Talvi (forthcoming). Izquierdo, Ottonello and Talvi (forthcoming).

-4.1%


(Structural)

1.0%

(Observed)


Structural Fiscal Balance

0,0%

Fiscal Balances by Country(Dec-06, in % of GDP)

LAC-7

Observed

1,1%

0,6%Argentina 1,8% -2,2%

-3,3%Brazil -3,0% -4,9%

6,1%Chile 7,7% 1,0%

-1,2%Colombia -0,5% -0,1%

-0,5%Mexico 0,1% -4,5%

0,6%Peru 2,1% -1,8%

-2,0%Venezuela -0,2% -16,0%

Traditional HP Filter* “Chilean” Fiscal Rule**Fiscal Balance

-4,1%

LAC-6 is the simple average of Argentina, Brazil, Colombia, Mexico, Peru and Venezuela. LAC-7 is the simple average of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP. Fiscal balances include: Public Sector (Mexico), Non-Financial Public Sector (Argentina, Colombia, Peru), General Government (Brazil), Central Government (Chile, Venezuela).

*HP = Hodrick Prescott; lambda = 1600 (quarterly data). **Izquierdo, Ottonello and Talvi (forthcoming).

-1,0%LAC-6 0,0% -4,9%

Fiscal Revenues and Expenditures*


Russian Crisis Beginning of Current Boom

Russian Crisis

Fiscal Expenditures

Fiscal Revenues

Adjusted Revenues

Adjusted Revenues

Fiscal Expenditures

Fiscal Revenues

Chile

85

135

185

235

285

335

1991

1993

1995

1997

1999

2001

2003

2005

(Fiscal Revenues, Mar-91 = 100)

Latin America (LAC-7, Fiscal Revenues, Mar-91 = 100)

85

135

185

235

285

335

1991

1993

1995

1997

1999

2001

2003

2005




(Adjusted revenues computed by applying the “Chilean Fiscal Rule” to other LAC-7 countries)


Russian Crisis

85

135

185

235

285

335

1991

1993

1995

1997

1999

2001

2003

2005

Fiscal Expenditures

Fiscal Revenues

Adjusted Revenues




Increase in Public Expenditures (in % of increase in fiscal revenues, 2003-2006)

0% 20% 40% 60% 80% 100%

Chile

Argentina

Peru

Colombia

Mexico

Brazil

Venezuela

LAC-7: 77%

(LAC-7, Fiscal Revenues, Mar-91 = 100; Adjusted Revenues following the “Chilean Fiscal Rule”)


Revenue Bonanza and Government Expenditure in Latin America

Revenue Bonanza and Government Expenditure in Latin America

Public Investment Expenditure

17.2%

13.1%

14.0%

10%

11%

12%

13%

14%

15%

16%

17%

18%

1998 2002 2007

(LAC-7, in % of Primary Expenditure)


Russian Crisis

85

135

185

235

285

335

1991

1993

1995

1997

1999

2001

2003

2005

Fiscal Expenditures

Fiscal Revenues

Adjusted Revenues


*Fiscal balances include: Public Sector (Mexico), Non-Financial Public Sector (Argentina, Colombia, Peru), General Government (Brazil), Central Government (Chile, Venezuela).


(LAC-7, Fiscal Revenues, Mar-91 = 100; Adjusted Revenues following the “Chilean Fiscal Rule”)


Observed and Structural Public DebtObserved and Structural Public Debt**

(LAC-7, in % of GDP)

30%

35%

40%

45%

50%

55%1

99

0

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

Current Boom90s Boom Russian Crisis


52%

37%

33%

50%

(Observed Debt)



47%

44%(Structural Debt)


QUESTIONS FOR DISCUSSION: FISCAL POLICY (I)

Do you think having Do you think having explicit structural fiscal balance explicit structural fiscal balance targetstargets à la Chile could be useful for your country? à la Chile could be useful for your country? If so, If so, what are the difficulties in implementing such a rule?what are the difficulties in implementing such a rule?

From a fiscal policy perspective, does your country fit the From a fiscal policy perspective, does your country fit the regional patternregional pattern? Why yes or why not?? Why yes or why not?

Do you consider the Do you consider the structural fiscal balancestructural fiscal balance a relevant a relevant concept for evaluating the stance of fiscal policy? If so, is concept for evaluating the stance of fiscal policy? If so, is a a ‘Chilean-Style’ smoothing‘Chilean-Style’ smoothing (i.e. saving the boom to a (i.e. saving the boom to a large extent) relevant for your own country? large extent) relevant for your own country?

QUESTIONS FOR DISCUSSION: FISCAL POLICY (II)

Should structural fiscal balance targets be established Should structural fiscal balance targets be established taking into account the target levels of taking into account the target levels of structural public structural public debtdebt? How should these target levels be determined? Is ? How should these target levels be determined? Is the 20% of GDP rule of thumb a valid one for your the 20% of GDP rule of thumb a valid one for your country?country?

Assuming that we are in the presence of a permanent Assuming that we are in the presence of a permanent improvement in the external environment, which is the improvement in the external environment, which is the optimal way of assigning the increase in fiscal optimal way of assigning the increase in fiscal revenuesrevenues in your country: increase current in your country: increase current expenditure, increase capital expenditure, debt expenditure, increase capital expenditure, debt reduction or reduction in tax rates?reduction or reduction in tax rates?

Public Debt ManagementPublic Debt Management


Debt Riskiness(LAC-7, Risky Debt in % of Total Domestic Debt*)

50

55

60

65

70

75

80

1991

1993

1995

1997

1999

2001

2003

2005

Mutation in Debt Riskiness: Two Revealing Examples

(Risky Debt in % of Total Domestic Debt**)

**For Mexico, risky debt is computed by taking the ratio of Tesobonos (denominated in US dollars) to total domestic public debt. The latter includes Cetes, Bondes Ajusta Bonos and Tesobonos. For Brazil, risky debt is constructed by taking the ratio of the sum of domestic public debt indexed to the Selic plus exchange-rate-indexed debt over total domestic public debt.

5%

28%

67%

90%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-93 Nov-94Mexico

Aug-97 Dec-98Brazil

*Risky debt includes foreign-currency debt, short-term debt and variable interest rate debt. LAC-7 excludes Peru.

Debt Composition in Latin America‘This Time Is Different’ ‘All That Glitters May Not Be Gold’

QUESTIONS FOR DISCUSSION: PUBLIC DEBT MANAGEMENT

From a risk perspective, do you believe that changes in From a risk perspective, do you believe that changes in debt composition are a reasonable debt composition are a reasonable substitutesubstitute for the for the reduction in debt levels? reduction in debt levels?

Form a public debt management perspective, does your Form a public debt management perspective, does your country fit the country fit the regional patternregional pattern? Why yes or why not?? Why yes or why not?

How much of the change in debt composition is How much of the change in debt composition is structuralstructural and how much due to and how much due to favorable international favorable international conditionsconditions??

If so, how should If so, how should debt composition targetsdebt composition targets be be determined? determined?

External PositionExternal Position

Capital Flows to Latin America*

Russian Crisis

-20

0

20

40

60

80

100

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

(LAC-7, Billions of US Dollars)Net Capital Flows

LAC-7 is the sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.

* Calvo and Talvi (2007).

Russian Crisis

Capital Inflows and Outflows(LAC-7, Billions of US Dollars)

-20

0

20

40

60

80

100

120

140

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Outflows

Inflows


Russian Crisis

Jan.91-Jun.98

Variation:

271%

Jun.98-Dec.02 Variation: -

15%

Dec.02-Dec.07 Variation:

175%

International Reserves in Latin America

174

404

*LAC-7 is is computed as the sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.

International Reserves

15

65

115

165

215

265

315

365

415

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

(LAC-7, Billions of US Dollars*)


International Reserves to M2 Ratios (LAC-7, in %)

Dic

-93

Dic

-94

Dic

-95

Dic

-96

Dic

-97

Dic

-98

Dic

-99

Dic

-00

Dic

-01

Dic

-02

Dic

-03

Dic

-04

Dic

-05

Dic

-06


Russian Crisis

0.30

0.35

0.40

0.45

0.50

0.55

LAC-7

44%

40%


International Reserves in Latin America

International Reserves to M2 Ratios (LAC-7, in %)

10

15

20

25

Dic

-93

Dic

-94

Dic

-95

Dic

-96

Dic

-97

Dic

-98

Dic

-99

Dic

-00

Dic

-01

Dic

-02

Dic

-03

Dic

-04

Dic

-05

Dic

-06

LAC-7

17.0


Russian Crisis

16.9

EA-5 is the simple average of Indonesia, Korea, Malaysia, Philippines and Thailand.

13.0

EA-5

22.1

*LAC-7 is is computed as the sum of the seven major Latin American countries, namely Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. These countries represent 91% of Latin America’s GDP.


Russian Crisis

174

404

15

65

115

165

215

265

315

365

415

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Jan.91-Jun.98

Variation:

271%

Jun.98-Dec.02 Variation: -

15%

Dec.02-Dec.07 Variation:

175%

(LAC-7, Billions of US Dollars*)International Reserves


QUESTIONS FOR DISCUSSION: EXTERNAL POSITION (I)

Is there Is there information availableinformation available at the country level to at the country level to make a sectoral analysis of the capital account?make a sectoral analysis of the capital account?

Do you think that a Do you think that a sectoral perspectivesectoral perspective of the of the capital account offers a relevant angle for capital account offers a relevant angle for vulnerability analysisvulnerability analysis? ?

From a capital account perspective, does your From a capital account perspective, does your country fit the country fit the regionalregional pattern? Why yes or why pattern? Why yes or why not?not?

QUESTIONS FOR DISCUSSION: EXTERNAL POSITION (II)

Which are the effective ways of financial insurance in the Which are the effective ways of financial insurance in the absence of international risk sharing arrangements? absence of international risk sharing arrangements? Should reserves be acquired with genuine resources, i.e. Should reserves be acquired with genuine resources, i.e. fiscal surpluses that take into account an fiscal surpluses that take into account an optimal pattern optimal pattern of reserve accumulationof reserve accumulation??

Do international reserves obtained by issuing monetary Do international reserves obtained by issuing monetary liabilities (including sterilization bonds) really constitute liabilities (including sterilization bonds) really constitute an an effective insuranceeffective insurance, available in times of sudden , available in times of sudden stops? Is stops? Is reserves-to-M2 ratioreserves-to-M2 ratio a relevant indicator in a a relevant indicator in a context of flexible exchange rates? context of flexible exchange rates?

Latin America and the Latin America and the US Subprime CrisisUS Subprime Crisis

US High Yield

Bond Prices by Region(US High Yield and Latin EMBI Bond Price Equivalent, 23-Jul-07 = 100)

88

90

92

94

96

98

100

102

104

Jul-0

7

Aug

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Latin America

Sep

-07

Feb

-08

Latin America 0%US High Yield -10.8%

Variation*

Bond Price (in %)

Spread (in bps)

*23 Jul-19 Feb

105

305

Latin America’s Reaction to US Subprime Crisis

Bond Prices by Region(US High Yield, Latin EMBI, Asia EMBI and Europe EMBI,

Bond Price Equivalent, 23-Jul-07 = 100)

88

90

92

94

96

98

100

102

104

Jul-0

7

Aug

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Latin America

US High Yield

Sep

-07

Feb

-08

Asia

Emerging Europe

Latin America 0%US High Yield -10.8%

Variation*

1.3%Asia

2.8%Emerging Europe

Bond Price (in %)

Spread (in bps)

*23 Jul-19 Feb

105

305

90

81

Emerging Markets’ Reaction to US Subprime Crisis

Speculative Grade -0.3%US High Yield -10.8%

Variation**

3.2%Investment Grade

Bond Price (in %)

Spread (in bps)

**23 Jul-19 Feb

127

298

108

* Standard & Poor’s Credit Ratings prior to US subprime crisis.

SpeculativeGrade

AAA

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

BB+

BB

BB-

B+

B

B-

CCC+

CCC

CCC-

CC

SD

Credit Ratings*

InvestmentGrade

Investment Grade

Speculative Grade

* A country with strong fundamentals is defined as a country that displays both a current account and a fiscal surplus and a country with weak fundamentals is a country that displays both a current account and a fiscal deficit.

Strong Fundamentals*

Weak Fundamentals*

Weak Fundamentals -1.3%US High Yield -10.8%

Variation**

-0.2%Strong Fundamentals

Bond Price (in %)

Spread (in bps)

**23 Jul-19 Feb

140

298

76

Bond Prices in Emerging Countries and Fundamentals(US High Yield and EMBI Bond Price Equivalent, 23-Jul-07 = 100)

87

90

93

96

99

102

105

108

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

US High Yield

Emerging Markets’ Reaction to US Subprime Crisis

US

Hig

h Y

ield

and

EM

BI B

ond

Pric

e E

quiv

alen

t (2

3-Ju

l-07

= 1

00)

87

89

91

93

95

97

99

101

103

105

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

US High Yield

Investment Grade

FE

D F

unds

targ

et r

ate,

in %

2.5

3

3.5

4

4.5

5

5.5

Fed Funds RateSpeculative Grade

Bond Prices in Emerging Countries and the Fed Funds Rate

Emerging Markets’ Reaction to US Subprime Crisis and the Fed

QUESTIONS FOR DISCUSSION: THE US SUBPRIME CRISIS AND LATIN AMERICA

What is What is your interpretationyour interpretation of the apparently limited of the apparently limited reaction of Latin America to the US Subprime Crisis? reaction of Latin America to the US Subprime Crisis?

Could the US Subprime CrisisCould the US Subprime Crisis create an create an ‘Indian ‘Indian Summer’Summer’ in the region? If so, what should be the in the region? If so, what should be the policy responsepolicy response? Should monetary and fiscal policy ? Should monetary and fiscal policy be tightened?be tightened?

Should we expect a Should we expect a Volcker-jump in interest ratesVolcker-jump in interest rates once the financial crisis in the US subsides? If so, once the financial crisis in the US subsides? If so, what should our countries be doing to protect what should our countries be doing to protect themselves from that eventuality?themselves from that eventuality?



May 8May 8thth, 2008, 2008

Prepared for Presentation at the XXVII Meeting of the Latin American Network of Prepared for Presentation at the XXVII Meeting of the Latin American Network of Central Banks and Finance Ministries, IADB, Washington DC. This Presentation is Central Banks and Finance Ministries, IADB, Washington DC. This Presentation is

based on the IADB Research Department report “All That Glitters May Not Be Gold: based on the IADB Research Department report “All That Glitters May Not Be Gold: Assessing Latin America’s Recent Macroeconomic Performance”, coordinated by Assessing Latin America’s Recent Macroeconomic Performance”, coordinated by

Alejandro Izquierdo and Ernesto Talvi Alejandro Izquierdo and Ernesto Talvi

All That Glitters May Not Be Gold: Debating Key Issues May 8 th, 2008 Prepared for Presentation at...

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