Western Hemisphere
Grappling with the Global Financial Crisis
October 2008
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See also Executive Summary in Português
The ongoing global turmoil represents a confluence of negative shocks for Latin America and the Caribbean: a freeze in global credit markets, weaker external demand, and lower commodity prices. But the region is expected to deal with these global shocks better than in previous crises, reflecting progress made in improving macroeconomic fundamentals over the past decade. Still, there are a number of downside risks going forward. Against this uncertain background, the report discusses the implications of the global financial crisis for the regional outlook and the corresponding challenges facing policymakers.
Contents
| Executive Summary | |
| I. | Global, U.S., and Canadian Outlook |
| Global Outlook | |
| U.S. Outlook: Major Downturn with Protracted Recovery | |
| Canadian Outlook: Feeling Effects of U.S. Slowdown | |
| II. | Latin American and Caribbean Outlook |
| Context | |
| A Varying Policy Mix | |
| Economic Outlook and Risks | |
| Policies: Maintaining Confidence and Stability | |
| III. | Keeping Inflation Under Control |
| Rising Inflation | |
| Monetary Policy Has Been Tightened | |
| Conclusions | |
| Appendix 3.1 | |
| IV. | Elevated Food Prices and Vulnerable Households: Fiscal Policy Options |
| Elevated Food Prices Trigger Policy Debate | |
| Food Price Inflation Can Have Strong Welfare Effects | |
| Fiscal Policy Can Help Ease Burden on the Poor | |
| Conclusions | |
| Appendix 4.1 | |
| V. | Corporate Vulnerability: Have Firms Reduced Their Exposure to Currency Risk? |
| Firms Facing More Currency Volatility | |
| Stronger Balance Sheets | |
| Beyond Balance Sheets: A Market-Based Approach | |
| More Active Use of Foreign Currency Derivatives | |
| Conclusions | |
| Appendix 5.1 | |
| VI. | Boosting Private Investment in the Long Term |
| Investment Still Lagging | |
| Importance of Macro Stability | |
| Beyond Macro Stability | |
| Rule of Financing Constraints | |
| Conclusions | |
| Appendix 6.1. Estimation Methods | |
| Western Hemisphere: Main Economic Indicators | |
| Latin America and the Caribbean: Main Fiscal Indicators | |
| References | |
| Boxes | |
| 1.1 | United States: Quantifying Macrofinancial Linkages |
| 2.1 | Determinants of Sovereign Bond Spreads in Latin America |
| 2.2 | Financial System Stability Developments |
| 2.3 | Differential Impact of Commodity Boom |
| 2.4 | Inflation and Poverty |
| 2.5 | The Caribbean: Weathering the Global Storm |
| 2.6 | Do Migrant Remittances to the LAC Region Fall During U.S. Slowdowns? |
| 2.7 | Spillovers from the United States to Latin America |
| 2.8 | Absorbing the Oil Shock in Central America and the Caribbean: The Role of Petrocaribe |
| 4.1 | Impact of Rising Food Prices on Poverty |
| 4.2 | Policy Responses to Ease Effects of Higher Food Prices |
| 4.3 | Can Import Tariff Reductions Help Reduce Food Prices in the Region? |
| 6.1 | Literature on Financing Constraints and Investment |