1. Addressing the Downturn in LAC: Policy Analysis Guillermo Calvo Columbia University XXIX Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington, DC, April 22-23, 2009.

2. UNPRECEDENTED TIMES?

3. THIS?

4. NOT REALLY

5. EMBI+ Yield & Terms of Trade in LAC (quarterly data, Terms of Trade Index 1997-I = 100, EMBI+ Yield) Note: Terms of trade series include Argentina, Brazil, Chile, Colombia, Mexico and Peru. Simple average. Source: IADB and Bloomberg.

6. Estimated Sudden Stop Probabilities (Based on Calvo, Izquierdo and Mejia, NBER Working Paper 14026, 2007) Notes: Simple country averages. LAC7 includes Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. CAC5 includes Costa Rica, Guatemala, Honduras, Nicaragua and Dominican Republic. Eastern Europe includes Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Turkey.

7. FORTUNATELY WE STILL HAVE TIME FOR THIS...

9. POLICIES Liquidity Provision Monetary Fiscal

10. LIQUIDITY PROVISION Types: External, e.g., FCL (long term and weak conditionality). Domestic, e.g., use of International Reserves. Risks It may lead private sector to increase its exposure to Liability Dollarization. It may stimulate Capital Flight.

11. Gross External Debt in LAC (billions USD) Note: Public Sector includes General Government and Monetary Authorities. Private Sector figures include the Banking Sector, Non- Financial Private Sector and Intercompany lending. Source: BIS-IMF-OECD-WB Joint External Debt Hub. Argentina Chile Mexico Brazil Colombia Peru Private Public

12. MONETARY EMs have limited control on market interest rates. However, monetary policy can have a significant effect on the exchange rate. Easy monetary policy has muted effect on inflation because of global price deflation (e.g., commodities). However, since devaluation is a general phenomenon, its expansionary effect on output is limited.

13. US Inflation (monthly data, y-o-y % change in CPI and PPI) Source: IMF - IFS. PPI Inflation CPI Inflation

14. Export Prices in LAC (monthly data, Unit Value of Exports in USD, Jan-94=100) Note: Western Hemisphere Index. Source: IMF - IFS.

15. Exchange Rates (daily data, Indices 9/3/2007=100, last value 04/09/09) Note: Simple averages. LAC: Argentina, Brazil, Chile, Colombia, Bolivia, Mexico, Peru and Uruguay. Emerging Europe: Russia, Hungary, Czech Republic, Slovakia, Bulgaria, Turkey and Poland. Emerging Asia: Korea, Indonesia, Malaysia, Philippines and Thailand. Source: Bloomberg. Δ% since Aug-08 Emerging Europe28% LAC19% Emerging Asia13%

16. FISCAL As shown in IDB’s report, there seems to be little room for expansionary fiscal policy. LAC’s bonanza savings are insufficient to afford counter-cyclical fiscal policy in lean times. Priority should be given to social protection through income redistribution or credit lines from Multilateral Development Banks.

17. LOOKING FORWARD

18. LAC is well positioned relative to other EMs (e.g., Eastern Europe) to take advantage of a global rebound, because being relatively strong in capital markets, just the expectation of a global rebound will be reflected in higher commodity prices (is this already happening?) Thus, the next issue may be inflation like in 2008 Q-I. Another reason to take a prudent stance on monetary and fiscal expansionary policies.

19. Commodity Prices (daily data, Index 3-Sep-07= 100, last value 4/7/09) Source: Bloomberg.

20. Addressing the Downturn in LAC: Policy Analysis Guillermo Calvo Columbia University XXIX Meeting of the Latin American Network of Central Banks and Finance Ministries, IDB, Washington, DC, April 22-23, 2009.