Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter?

Dealing with an International Credit Crunch, Policy Responses to Sudden Stops in Latin America, 2009

54 Pages Posted: 21 Jun 2012

See all articles by Alberto Ortiz

Alberto Ortiz

Oberlin College; EGADE Business School del Tecnológico de Monterrey

Pablo Ottonello

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Federico Sturzenegger

Universidad Torcuato Di Tella; Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Ernesto Talvi

Centro de Estudios de la Realidad Economica y Social (CERES)

Date Written: 2009

Abstract

In this paper we ask whether tighter monetary and fiscal policies are the right way to face a sudden stop (a sudden curtailment in capital flows) in a typical emerging economy. We develop exogenous measures of fiscal and monetary policy response and conclude that tighter policies are associated to larger falls in output. The conclusion of the analysis is not so much that macro policies should be relaxed upon a crisis, but that countries should prepare themselves by creating the conditions to be able to act countercyclically upon such events. This entails among other things reducing balance sheet mismatches or strengthening fiscal results during expansions.

Keywords: Sudden Stop, Fiscal Policy, Monetary Policy, Structural Fiscal Balance, Bayesian Estimation

JEL Classification: C11, E52, E63, F32

Suggested Citation

Ortiz, Alberto and Ottonello, Pablo and Sturzenegger, Federico and Talvi, Ernesto, Monetary and Fiscal Policies in a Sudden Stop: Is Tighter Brighter? (2009). Dealing with an International Credit Crunch, Policy Responses to Sudden Stops in Latin America, 2009, Available at SSRN: https://ssrn.com/abstract=2088931

Alberto Ortiz (Contact Author)

Oberlin College ( email )

Oberlin, OH 44074
United States

EGADE Business School del Tecnológico de Monterrey ( email )

Av. Eugenio Garza Sada #2501
Col. Tecnológico
Monterrey, Nuevo León 64849
Mexico

Pablo Ottonello

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Federico Sturzenegger

Universidad Torcuato Di Tella ( email )

Minones 2159
1428 Buenos Aires, 1428
Argentina

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-496-3255 (Phone)
617-496-1722 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ernesto Talvi

Centro de Estudios de la Realidad Economica y Social (CERES) ( email )

Antonio Costa 3476
11300 Montevideo
Uruguay
(5982)628-7703 / 628 76 44 (Phone)
(5982)622-0526 (Fax)

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