We Would Have Gotten Wetter Without an Umbrella... But We Still Got Caught in a Heavy Storm: The 2007-200? Crisis in Latin America and Costa Rica

Abstract

The U.S. housing bubble burst in 2007 and very rapidly spread to the non-banking financial sector, affecting the new credit and insurance instruments that were developed in the unregulated markets. Afterwards its effects contaminated the banking system and led to a recession in most developed countries. The negative consequences of this crisis arrived to the developing nations with a lag, and the world economy in 2009 is experiencing its first production downturn since World War II and its worst economic contraction since the 1929 Great Depression. The Latin American and Caribbean (LAC) countries were better prepared than in previous occasions to face this challenge, but the crisis is producing a decrease in production and employment and an increase in poverty. Costa Rica has been experiencing the full effects of the crisis since the beginning of 2009, and its GDP is forecasted to diminish this year. Central Banks are following monetary policies promoting liquidity provision, capital injections to banks and other financial companies, and the disposal of so called “toxic” assets. Governments are also pursuing expansionary fiscal policies to boost aggregate demand. The results of these measures have so far been mixed. This paper reports on policies pursued by LAC and by Costa Rica in particular.