Growth across Latin America and the Caribbean is expected to remain subdued at 2½ percent in 2014. The firming recovery in the advanced economies will support export activity, but this positive impulse is likely to be offset in many countries by the impact of lower commodity prices, tighter external financing conditions, and domestic supply bottlenecks. Renewed volatility in financial markets and a sharper-than-expected decline in commodity prices represent distinct downside risks. Faced with these challenges, policymakers should seek to preserve credible policy frameworks and ensure sufficient buffers to cope with adverse shocks. For fiscal policy, a neutral to tighter stance will be appropriate in most countries, while exchange rate flexibility and proactive supervision of the financial system should serve as the principal defenses against external volatility. To boost medium-term growth prospects, further efforts are needed to raise infrastructure investment, improve educational outcomes, and enhance the business environment.

Contents

Preface

Executive Summary

1.  The United States, Canada, and the World: Outlook and Policy Challenges

  Global Backdrop: Strengthening Growth, but Downside Risks Remain   The United States: Recovery Gaining Ground, Momentum to Continue   Canada: Facing a Challenging Rebalancing in Growth 2. Outlook and Policy Challenges for Latin America and the Caribbean   Financially Integrated Economies   Other Commodity Exporters   Central America, Panama, and the Dominican Republic   The Caribbean   Annex 2.1. Data Disclaimer 3. Taper Tantrum or Tedium: How Will the Normalization of U.S. Monetary Policy Affect Latin America and the Caribbean?   Introduction   Spillover Channels   Sensitivity of Bond Yields to U.S. Monetary Shocks   A Capital Flow Perspective   Illustrative Results from a Full-Fledged Macro Model   Policy Implications 4. After the Boom—Commodity Prices and Economic Growth in Latin America and the Caribbean   Introduction   The Commodity Boom in LAC and Its Aftermath   Growth in LAC after the Commodity Boom   Annex 4.1. Technical Details 5. Has Fiscal Policy Become More Countercyclical in Latin America?   Introduction   Methodology   Regression Results   The Quality of Fiscal Policy   Conclusion   Annex 5.1. Summary of Empirical Literature List of Country Abbreviations References New Publications from the Western Hemisphere Department Boxes 1.1 Recent Trends in the U.S. Labor Force: The Role of the Hispanic Population 1.2 Unconventional Energy Boom in North America: Macroeconomic Implications and Challenges 2.1 Taking the Pulse: Leverage and Debt Servicing Capacity among Firms in Latin America 2.2 Potential Spillovers from Argentina and Venezuela 2.3 Energy Subsidies in Latin America and the Caribbean