## Annex 1. Summary of Background Papers

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### Capital Flows to Latin America in the Aftermath of the Commodities Super-Cycle
- Based on the background paper “Capital Flows to Latin America in the Aftermath of the Commodities Super-Cycle” (IMF 2019a) prepared by Carlos Goncalves, Antonio David, and Samuel Pienknagura.
- Key findings:
  - Volatile capital flows pose important challenges to countries in Latin America and the Caribbean (LAC) because of their dependence on external savings to finance investment.
  - Since 2012, portfolio inflows have driven most of the variability of capital flows to the region.
  - The importance of global risk aversion and growth differentials relative to advanced economies in driving capital flows has increased in recent years, raising the likelihood of a sudden reversal of capital inflows if regional growth falters and global investor sentiment shifts amid significant policy uncertainty.
  - Emerging markets are prone to boom–bust patterns in capital flows, which entail substantial economic costs and force painful adjustment.
  - High fiscal deficits, large current account deficits, and high levels of liability dollarization increase vulnerability to sudden stops; low inflation and adequate reserve buffers reduce susceptibility to adverse effects of disruptions in capital flows.
- Empirical policy-relevant results:
  - Countries with floating exchange rate regimes tend to experience shorter sudden stops in capital flows.
  - Flexible exchange rate regimes are associated with substantially lower output losses from sudden stops.
  - A tighter monetary policy stance following a sudden stop episode is linked to a reduction in its duration and the ensuing deceleration in growth.
  - Increasing capital controls does not affect the duration of sudden stops in a significant way.
- Notes/definitions from source:
  - LA7 = Argentina, Brazil, Chile, Colombia, Mexico, Peru, Uruguay.
  - Periods referenced: 2012; 2000–18; 2012–18.

### Sovereign Spreads and Fiscal Consolidations
- Based on the background paper “Sovereign Spreads and Fiscal Consolidations” (IMF 2019c) prepared by Juan Yépez, Antonio David, and Jaime Guajardo.
- Context:
  - Lower commodity prices, mediocre growth, and a prolonged period of low global interest rates have contributed to rising public debt in many LAC countries.
  - Financial markets’ perception of credit risk in LAC has deteriorated somewhat, prompting policymakers to announce fiscal consolidation measures to reduce public debt and improve confidence as measured by sovereign bond spreads.
- Key empirical findings (2000–18):
  - Sovereign spreads decline significantly following news that consolidation measures have been approved by Congress, particularly in periods of high sovereign spreads or in countries under an IMF program.
  - Consolidation packages are more successful—leading to smaller output losses and larger reductions in the public debt-to-GDP ratio—when sovereign spreads significantly decline following a fiscal consolidation announcement.
  - These results provide direct evidence that credible consolidation efforts get rewarded in periods of fiscal stress; confidence effects are crucial in mitigating the drag on economic activity after consolidation.
- Notes/metrics:
  - Estimates based on local projection methods; shaded areas indicate 90 percent confidence intervals using HAC standard errors.
  - EMBIG = J.P. Morgan Emerging Market Bond Index Global.
  - Sample period: 2000–18.

### Labor Market Dynamics and Informality over the Business Cycle in LAC
- Based on the background paper “Labor Market Dynamics and Informality over the Business Cycle in LAC” (IMF 2019d) prepared by Jorge Roldos, Antonio David, Camila Pérez, and Samuel Pienknagura.
- Labor market characteristics in LAC:
  - High levels of informality, low female participation rates, and relatively rigid employment protection legislation.
- Key findings:
  - Informality is countercyclical; the formal–informal adjustment margin reduces the importance of the employment–unemployment margin (informality dampens the usual Okun’s coefficient relating unemployment to cyclical changes in GDP).
  - Changes in aggregate participation rates are positively related to changes in GDP.
  - There is some evidence that the female participation rate is countercyclical during recessions in LAC.
  - Rigid employment protection legislation—such as higher redundancy costs, cumbersome dismissal regulations, and relatively high minimum wages—is associated with increased informality.
  - Informality slows adjustment to shocks and has a negative impact on productivity and growth; LAC countries typically adjust more slowly to economic shocks compared with other countries in part because of rigid employment protection legislation.
- Data sources and notes:
  - Sources: Haver Analytics; International Labour Organization; and IMF staff calculations.
  - Cross-country comparisons and metrics include Okun’s coefficient averages and informality responsiveness coefficients; regional groupings referenced include AE = advanced economies; CA = Central America; EM = emerging markets; LAC = Latin America and the Caribbean; MEX = Mexico; SA = South America.

*International Monetary Fund | October 2019*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2019/october/english/annexbackground.pdf_