In the wake of the global financial crisis, monetary and fiscal policies were used aggressively to counteract the effects of the crisis on economic activity. Policymakers look at a number of indicators to guide them in assessing an economy’s level of activity relative to its productive capacity. But trying to figure out the position of the economy in real time is often quite challenging, with consequences for setting policy.
In the case of Brazil in 2011, for example, policymakers estimated in real time that the economy was at a level of output consistent with its productive capacity. Over time, however, the assessment of the cyclical position of the Brazilian economy changed drastically. It had not just been at full capacity, but was overheating. The economy was actually facing inflationary pressures, requiring policy tightening to bring it back to the central bank’s target.
Filed under: Economic Crisis, Economic outlook, Economic research, Emerging Markets, Español, Finance, Fiscal policy, growth, IMF, International Monetary Fund, Investment, Latin America, Public debt | Tagged: Brazil, central bank, Chile, Colombia, fiscal policies, inflation, Latin America, macroeconomics, Mexico, monetary policy, Peru | Leave a comment »