Working Paper 23-7: Rare macroeconomic disasters and lost decades in Latin America

Latin America will have suffered another lost decade in the 2013-2025 period due to the negative terms of trade shock, the COVID-19 shock, the unraveling of macroeconomic disequilibria in some countries, and the inability to weather a variety of additional shocks emerging in 2022. [...] Fortunately, these countries represented around 87 percent of the “Latin America and the Caribbean” aggregate commonly used by the IMF in 2022 with the rest of countries entailing smaller economies in the continent and the Caribbean. [...] As discussed in the introduction, policy choices during the pandemic are important to explain the heterogeneous impact of COVID-19 on the economies of the region. [...] Following previous work, we compute the probability of an economy moving from a state of normalcy to a state of disaster as the number of disasters divided by the number of normalcy years (in turn, given by subtracting the number of years spent in disaster from the overall number of annual observations). [...] The concept emanated from the experience of economic stagnation in Japan in the 1990s, but the experience it describes has been observed in many other countries, including Latin America in the 1980s.