Western Hemisphere

Watching Out for Overheating

April 2011

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The theme of this issue of the Regional Economic Outlook: Western Hemisphere, "Watching out for Overheating," reflects risks for much of the region from rising inflation, strong domestic demand resulting in widening current account deficits, and strong credit and asset price growth. A dual outlook for the global economy, in which growth in emerging economies continues to outstrip growth in advanced economies, has implications for policy challenges facing emerging market economies in the region. And in the Caribbean, where public debt is high, fiscal policy will need to be consolidating, to ensure macro stability and set the stage for future growth. For all countries, rising global commodity prices, especially that of food, threaten social safety networks for the most vulnerable populations.




Contents

Preface
 
Executive Summary
 
1. Global, U.S., and Canadian Outlook
  1.1. The Global Outlook—A Dual Speed Expansion Proceeds with Increasing Risks
        Advanced Economies
        Emerging Market Economies
  1.2. United States—Ongoing Recovery with Downside Risks
        What Kinds of Policies Are Needed?
  1.3. Canada—Recovery Gathers Strength
  1.4. Implications for the Latin American and Caribbean Region
 
2. Outlook and Policy Issues for Latin America and the Caribbean
  2.1. Overview
  2.2. Policy Challenges
        South America—Managing Double Tailwinds
        South America—The Less Financially Integrated Commodity       Exporters
        Mexico and Central America—Rebuilding Policy Buffers
        The Caribbean—Recovery Beginning Amid High Debt
  2.3. Dealing with the Oil and Food Price Shock
        Impact of Global Commodity Price Shocks on Inflation
        Monetary Policy in the Face of Commodity Price Shocks
        Social Policies and Commodity Price Shocks: Protecting the Poor
  2.4. Credit Markets and Asset Prices—Are Bubbly Conditions Taking Hold?
        Bank Credit Growth
        Corporate Indebtedness
        Equity Prices
       Housing Prices
  2.5. Capital Inflows—Guarding Against the Reversal of Favorable Global Conditions
  Annex 2.1. Estimating Inflation Pass-Throughs
 
3. Foreign Exchange Market Intervention: How Good a Defense Against Appreciation Winds?
  3.1. Introduction
  3.2. Key Trends
  3.3. Modalities of Intervention
  3.4. Searching for Effects of Intervention: New Evidence
     An Econometric Panel Approach
     Triggers for Intervention
     Effects of Intervention
     Effectiveness––Event Analysis of Regime Shifts
  3.5. Quasi-Fiscal Costs of FXI
  3.6. Takeaways and Policy Considerations
  Annex 3.1. Foreign Exchange Intervention and International Reserves: Data Availability
  Annex 3.2. Methodological Strategy for the Panel Approach
  Annex 3.3. Confidence Intervals for the Synthetic Currency
 
  Western Hemisphere: Main Economic Indicators
 
  Latin America and the Caribbean: Main Fiscal Indicators
 
  References
 
  New Publications from the Western Hemisphere Department, July 2009–April 2011
 
  Boxes
  1.1. Long-Term Outlook for the U.S. Federal Government Finances
  1.2. Household Deleveraging in the United States
  1.3. Canada’s Financial System Resilience: What Can Others Learn?
  2.1. Changing Export Patterns in Latin America and the Caribbean
  2.2. An Update on Macroprudential Policies
  2.3. Haiti: Economic Developments since the January 2010 Earthquake
  2.4. Caribbean Offshore Financial Centers: Opportunities and Challenges
  2.5. The Information Value of Core Inflation
  2.6. Stock Market Developments in the Region: The Role of Commodities
  3.1. Actual Intervention and Changes in Gross International Reserves
  3.2. Foreign Exchange Intervention Rules in Practice: Selected Latin American Experiences
  3.3. Instruments for Foreign Exchange Purchases
  3.4.Channels of Transmission of Foreign Exchange Intervention to the Exchange Rate
  3.5. Overview of Recent Empirical Studies on Foreign Exchange Intervention in Latin America