Costa Rica During the Global Recession: Fiscal Stimulus with Tight Monetary Policy

Publication Date:

Publisher: Center for Economic and Policy Research

Author(s): Jose Antonio Cordero

Research Area: Banking and finance

Keywords: Interest rate; Money supply; Foreign credit

Type: Report

Coverage: Costa Rica

Abstract:

This paper shows that, in spite of a reasonably sized fiscal stimulus package, Costa Rica’s economy continues on a downward path, partly because fiscal policy is being offset by a tightening of monetary policy. The paper notes that the International Monetary Fund has insisted that Costa Rica’s monetary policy remain tight due to worries over inflation targets and a perceived risk of a balance of payments crisis. However, the author notes that the IMF could help prevent a balance of payments crisis through the provision of a credit line of foreign currency, as it has done, for example, in Mexico – a vastly larger economy.

The paper also examines the government’s macroeconomic policies in recent years, prior to the world recession, to see what alternative policies might have done better.