A new paper from the Center for Economic and Policy Research 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 International Monetary Fund (IMF) is urging this monetary tightening.

The paper, "Costa Rica During the Global Recession: Fiscal Stimulus with Tight Monetary Policy," by Jose Antonio Cordero, examines how Costa Rica's monetary policy has undermined its fiscal policy as the government has sought to respond to the global recession.

"Costa Rica would do better by listening to those who advise that inflation shouldn't be a major concern during such a deep recession," Cordero said. "Instead, the Costa Rican government seems to have listened to the IMF, and this has hurt the economy."

In February 2009, the Costa Rican government launched the "Plan Escudo," a rescue package supposedly designed to serve as a "shield" against the global crisis, and providing a stimulus of about 2.8 percent of GDP.  Recent data, however, shows that the recession appears to be deepening in spite of the stimulus.  The paper notes that the IMF 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.

- Center for Economic and Policy Research.  www.cepr.net