Volatility and Growth in Latin America

Ratna Sahay · Rishi Goyal

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Fiscal Policies and Political Economy

Abstract

This paper compares the pattern of macroeconomic volatility in 17 Latin American countries during episodes of high and low growth since 1970, examining in particular the role of policy volatility. Macroeconomic outcomes are distinguished from macroeconomic policies, structural reforms and reversals, shocks, and institutional constraints. Based on previous work, a composite measure of structural reforms is constructed for the 1970-2004 period. We find that outcomes and policies are more volatile in low growth episodes, while shocks (except U.S. interest rates) are similar across episodes. Fiscal policy volatility is associated with lower growth, but fiscal policy procyclicality is not. Low levels of market-oriented reforms and structural reform reversals are also associated with lower growth.

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References

1993The role of macroeconomic factors in growth 1998Where Did All The Growth Go? External Shocks, Social Conflict, and Growth Collapses 2003The Case for Restricting Fiscal Policy Discretion 2005How do trade and financial integration affect the relationship between growth and volatility?

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