Inter-American Development BankApril 23, 2009

The opinions expressed in these comments are the responsibility of the author and do not necessarily represent the view of the IMF or its Board

of Directors

DiscussionAntonio Spilimbergo

(IMF and CEPR)

2

OutlineOutline ContextContext Sources of the shocksSources of the shocks Policy responsesPolicy responses Design of fiscal policyDesign of fiscal policy

3

Global Growth Global Growth

-2

0

2

4

6

8

10

Emerging

Real GDP

Advanced

1970 80 90 2000 1075 85 95 05

Global Growth(Percent change from a year ago)

World

4

Advanced Countries

Causes of the collapse of output: Continued financial crisis.

Direct effect of credit crunch

Trade

Investment

Indirect effects

Lower wealth

Collapsing confidence

Wait and see

5Industrial Activity and Global Trade Have Fallen Very Sharply

Merchandise Exports(Annualized percent change of 3mma over previous 3mma)

-20

-15

-10

-5

0

5

10

15

Jan-00 Jan-02 Jan-04 Jan-06 Jan-0830

35

40

45

50

55

60

65

Industrial Production(Annualized percent change of 3mma over previous 3mma)

Global IP

Global Manf. PMI(sa, RHS)

-40

-30

-20

-10

0

10

20

30

40

50

60

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Dec.08

World

Nov.08

Advanced

Emerging

6

40

50

60

70

80

90

100

110

120

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

U.S.

J apan

Euro area

U.K.

Fall in Stock Markets and Consumer Confidence

1/23 0

20

40

60

80

100

120

140

160

180

Jan-05 Jan-06 Jan-07 Jan-08

U.S.

Japan

Euro area

U.K.Dec.08

Equities(1/1/2007=100; FTSE)

Consumer Confidence(Jan. 2005=100)

LehmanBrothers

7

Emerging Economies – Latin America

Three Major Shocks:

Drop in External Demand;

Tighter Credit (External Financing); and

Lower Commodity Prices.

8

-40

-20

0

20

40

60

03 04 05 06 07 08 09

-10

-5

0

5

10

15

20

03 04 05 06 07 08 09

Emerging Economies Growth Slowed By Falling Exports and Industrial Production

Industrial Production(in percent change from a year

earlier)

Emg. Asia

Nov.08

Merchandise Exports(in percent change from a year

earlier)

Latin America

Emg. Asia

Latin America

Nov.08

Emg. Europe

Emg. Europe

9

Which Macroeconomic Which Macroeconomic Policies (do not) work? Policies (do not) work?

Export-led is not an option open to Export-led is not an option open to the world as a whole.the world as a whole.

The financial nature of the crisis The financial nature of the crisis weakens the traditional monetary weakens the traditional monetary transmission mechanism. transmission mechanism.

10

Role of Fiscal Policy During Role of Fiscal Policy During the Crisisthe Crisis

Fixing the financial system. Fixing the financial system. Supporting aggregate demand.Supporting aggregate demand. Attenuating the effects on most Attenuating the effects on most

vulnerable sectors.vulnerable sectors.

11

Fiscal PolicyFiscal Policy Public Spending on Goods and Public Spending on Goods and

ServicesServices Fiscal Stimulus Aimed at ConsumersFiscal Stimulus Aimed at Consumers Fiscal Stimulus Aimed at FirmsFiscal Stimulus Aimed at Firms

12Public Spending on Goods and Public Spending on Goods and ServicesServices

First, make sure that existing programs First, make sure that existing programs are not cut for lack of resources.are not cut for lack of resources.

Second, spending programs, from repair Second, spending programs, from repair and maintenance, to investment projects and maintenance, to investment projects delayed, can be (re-)started quickly.delayed, can be (re-)started quickly.

Third, a few high profile programs, with Third, a few high profile programs, with good long-run justification and strong good long-run justification and strong externalities, can also help, directly and externalities, can also help, directly and through expectations. through expectations.

13

To avoidTo avoid Public sector wage increases should Public sector wage increases should

be avoidedbe avoided not well targeted; not well targeted; difficult to reverse; and difficult to reverse; and similar to transfers in their similar to transfers in their

effectiveness. effectiveness.

14Fiscal Stimulus Aimed at Fiscal Stimulus Aimed at ConsumersConsumers

Three specific factors affect Three specific factors affect consumption at this juncture: consumption at this juncture: decrease in wealth; decrease in wealth; tighter credit constraints; andtighter credit constraints; and high uncertainty. high uncertainty.

15

Fiscal Stimulus Aimed at Fiscal Stimulus Aimed at ConsumersConsumers

Broad based tax cuts?Broad based tax cuts? marginal propensity to consume out of marginal propensity to consume out of

such tax cuts may be quite low. such tax cuts may be quite low. if the termination date is credible, the if the termination date is credible, the

intertemporal incentives implied by intertemporal incentives implied by such a measure are attractive.such a measure are attractive.

the degree of pass-through to the degree of pass-through to consumers is uncertain. consumers is uncertain.

16

Fiscal Stimulus Aimed at Fiscal Stimulus Aimed at FirmsFirms

Subsidies or measures to lower the Subsidies or measures to lower the tax-adjusted user cost of capital tax-adjusted user cost of capital (such as reductions in capital gains (such as reductions in capital gains and corporate tax rates) are unlikely and corporate tax rates) are unlikely to have much effect.to have much effect.

Restructuring procedures with Restructuring procedures with government guarantees on new government guarantees on new credit.credit.

17

Sustainability Sustainability ConcernsConcerns

Very importantVery important Not credible policies undermine Not credible policies undermine

the scope of fiscal stimulus.the scope of fiscal stimulus.

18

0

400

800

1200

1600

2000

2400

2800

3200

3600

Jul-07 Nov-07 Mar-08 Jul-08 Nov-08

External Financial PressuresExternal Financial Pressures

Emg. Sovereign CDS Spreads(index: 7/1/2007=100)

Current account surplus or small deficit

Current account deficit larger than 5% of 2007 GDP

1/23

19

0

20

40

60

80

100

120

140

160

180

200

Jun-07 Oct-07 Feb-08 Jun-08 Oct-08

United States

United Kingdom

Japan

Industrial Economies(5yr Sovereign CDS; in basis points)

0

20

40

60

80

100

120

140

160

180

200

Jun-07 Oct-07 Feb-08 Jun-08 Oct-08

France

Germany

Italy

Spain

1/23 1/23

Selected Europe(5yr Sovereign CDS; in basis points)

Rising Concerns Over Fiscal Sustainability

Source: Bloomberg, L.P.

20

Sustainability Sustainability ConcernsConcerns measures that are reversible or that have clear measures that are reversible or that have clear

sunset clauses (e.g., future increases in upper sunset clauses (e.g., future increases in upper income tax rates);income tax rates);

implementing policies that eliminate distortions implementing policies that eliminate distortions (e.g., financial transaction taxes);(e.g., financial transaction taxes);

increasing the scope of automatic stabilizers that, increasing the scope of automatic stabilizers that, by their nature, are countercyclical and temporary;by their nature, are countercyclical and temporary;

providing more robust medium-term fiscal providing more robust medium-term fiscal frameworks;frameworks;

strengthening fiscal governance through strengthening fiscal governance through independent fiscal councils; andindependent fiscal councils; and

improving expenditure procedures to ensure that improving expenditure procedures to ensure that stepped-up public works spending is well directed to stepped-up public works spending is well directed to raise long-term growth (and tax-raising) potential.raise long-term growth (and tax-raising) potential.