Macroeconomics for Development in Latin America and the Caribbean

Esteban Perez Caldentey and Daniel Titelman

International Journal of Political Economy, 2014, vol. 43, issue 1, 65-91

Abstract: The Macroeconomics for Development blueprint for Latin America and the Caribbean is articulated around two issues: an active strategy of productive development and a countercyclical policy stance. Macroeconomic countercyclicality refers to the management of the level of aggregate demand to dampen the fluctuations and volatility of real and nominal variables around their long-term trends. This paper argues that the cycle and trend are interdependent and that, as a result, countercyclical policies (i.e., aggregate demand policies) are not neutral to the long-run behavior of economies. The way counter cyclical policies are designed and implemented, including their timing and the type of instruments used, shape and determine, along with other factors, the long-run growth trend of economies. The nonneutrality of countercyclical policies is reflected in three specific features of the Latin American and Caribbean business cycle: (1) expansionary cycles are shorter and less intense in Latin America and the Caribbean in relation to other regions; (2) short-run fluctuations affect long-run outcomes through real and financial variables; (3) the financial system tends to act as an amplifier of real fluctuations, and real recoveries occur prior to credit recoveries. The analysis implies that countercyclical policy must not only steer the cycle through variations in the level of aggregate demand. It must also focus on the composition of aggregate demand. This entails, on the one hand, sustaining the duration and intensity of the expansion and avoiding the use of public investment as the adjustment variable during cycle fluctuations. It also means using macro prudential policy as a countercyclical tool to manage the composition and level of aggregate demand.

Date: 2014
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DOI: 10.2753/IJP0891-1916430107

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