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Dealing with an International Credit Crunch: Policy Responses to Sudden Stops in Latin America;

A new study by the Inter-American Development Bank shows that recessions are far less severe in countries with room to adopt more flexible monetary and fiscal policies. However, this is not something for all nations, as success depends on economic initial conditions at the time of the crisis.

The study alerts that countries in which governments have saved little during the commodity boom years will have limited scope to increase spending to alleviate the upcoming recession stemming from the current crisis. Any attempt to boost spending dramatically could erode confidence in the country’s ability to repay its debts in the future.

The IDB study “Dealing with an International Credit Crunch: Policy Responses to Sudden Stops in Latin America” looks into successful policy responses during past global financial crises and draws some important lessons that can shed some light to the policy options countries in the region are facing today.

”Without good initial economic conditions, countries have limited scope to act,” Said Eduardo Cavallo, one of the IDB economists that participated in the study said. “Still, initial conditions are not destiny. Adequate policy decisions and support from multilateral organizations can help alleviate some of such constraints.’’