The propagation of these effects is also marked by

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Unformatted text preview: ith exchange rate flexibility and high international reserves affording them maneuvering margins. These countries have in fact entered into aggressive monetary policy easing, especially since January 2009 (Figure 17). Some of them have also used actively their public banks to offset the decline in private bank credit. Monetary easing has helped cushion the decline in economic activity through two main channels. First, by lowering policy interest rates, it dampens the fall in investment and consumption. Second, by allowing the currency to depreciate, it helps curb imports while redirecting demand towards locally produced goods and services. Unfortunately, as noted earlier, many countries in LAC—particularly the small open economies in Central America and the Caribbean—lack the ability to conduct counter‐cyclical monetary policy. The main challenge for fiscal policy in LAC is to manage the inevitable fall in tax collection (related to the economic downturn and fall in commodity prices) so as to protect expenditures in education, social security, and infrastructure. These expenditures are necessary to prevent a rise in poverty and inequality and lay the foundations for future growth. In practice, however, the maneuvering room for counter‐cyclical fiscal policy varies considerably among LAC countries (Figure 18). It is greater in countries where: (i) savings were accumulated during good times (Chile is an indisputable leader in this regard); (ii) expenditures are not unduly rigid and can thus accommodate suitable changes in composition; (iii) the debt situation is such that there is scope for prudent borrowing; and (iv) local financial markets are relatively deep. However, given that the shortfall in fiscal revenues is likely to be substantial, a major achievement for LAC would already be to maintain fiscal spending at the initially planned level while protecting vital social and infrastructure programs. Some countries in the region have already announced fiscal stimulus packages. Nevertheless, there is a great deal of heterogeneity across countries with respect the composition and size of these packages. For instance, some countries have focused predominantly on tax cuts (Brazil), while others have planned to raise infrastructure spending (Mexico, Chile, and Peru). Moreover, some countries are reinforcing their social protection networks (Argentina and Chile) whereas others are providing incentives to non‐ traditional exports (Peru). The size of these packages also varies widely, ranging from 0.3 percent of GDP for Brazil to 2.2 percent for Chile. It is difficult however to ascertain the extent to which the announced fiscal stimulus adds to already existing plans or reallocates already budgeted spending. Furthermore, the effectiveness of some the fiscal measures announced (e.g., tax cuts) will depend on the private sector’s willingness to spend. Closing thoughts The world is gripped by the broadest, deepest, and most complex crisis since the Great Depression. As the current crisis was originated in the advanced world, its resolution mainly depends on the policies implemented there, particularly on...
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