Capital Flows and Destabilizing Policy in Latin America

Motivated by the excessive macroeconomic volatility experienced in Latin America, we examine the possible contribution of monetary and fiscal policies to this outcome. In contrast with previous literature, we consider the possible simultaneity between policy and GDP growth by using GMM VAR econometric techniques. Additionally, we explore the direct impact international capital inflows have on these policies. Our evidence suggests that for the group of countries we consider, most practice destabilizing fiscal and monetary policy, and capital inflow consistently influences policy in a pro-cyclical direction