plays a key role in the attenuation of economic slowdowns and in the stabilization of market sentiment. In Latin America the history of poor fiscal discipline has prevented policy makers from using fiscal policy for stabilization goals; and the weakening of market sentiment and corresponding limitations on access to affordable credit have required in most instances the adoption of pro-cyclical fiscal policies during economic downturns. The improvement of fiscal discipline and credibility in fiscal management has made possible the gradual adoption of countercyclical fiscal stances in some countries in the region as the cases of Brazil and Chile have shown in the 2000s.

The strengthening of fiscal discipline in certain countries in the region since the 1990s allowed for the generation of substantial public savings and the reduction of public debt (and the associated country risk), which in turn opened the necessary room for fiscal stimulus polices during the late 2008-2009 financial crisis. Some governments were able to avoid cutting expenditures, while others were able to raise expenditures to provide a boost to domestic demand and GDP (see also Eyzaguirre _et. al_ [2009]). Moreover, countries that had already adopted more sustainable fiscal policies before the crisis enjoyed greater fiscal space in which to establish countercyclical fiscal policy stances and thereby reduce the negative output effects experienced by many countries during 2009; among the leaders in the use of effective, responsible countercyclical policy were Chile, Colombia, Mexico, and Peru (see International Monetary Fund [2009]).

Since the 1990s several industrialized countries have adopted fiscal frameworks designed to promote rules-based countercyclicality through procedural and numerical policy rules, and a handful of developing nations are gradually beginning to follow suit. In Latin America, Chile has been successfully managing its fiscal policy within the framework of a structural budget rule that has enabled the government to establish an effective, transparent, and credible countercyclical fiscal policy stance. Fiscal frameworks and/or rules have been designed to reflect the particular conditions of a specific country or community of countries aimed at correcting the deficit bias of fiscal policies and at the same time making it possible the operation of more efficient automatic countercyclical stabilizers (targeting the cyclically-adjusted budget) and the adoption of discretionary countercyclical policies when needed (e.g. escape clauses). The effectiveness of countercyclical fiscal policy has also been reinforced in several cases by making the operation of automatic stabilizers more effective such as: tax reforms, reduction of tax evasion; lengthening the maturity of the public debt; issuance of contingent debt instruments and bonds denominated in local currency to hedge against exchange rate volatility; and stabilization funds that increase the stabilization role of fiscal policy.

The adoption of successful countercyclical fiscal policy frameworks has, however, required the presence of a record of transparent and credible fiscal institutions and fiscal policy, a political commitment to fiscal discipline, and a consolidated position of medium-term fiscal sustainability. Without these preconditions market sentiment and fiscal accounts would be adversely affected as past experience with expansionary fiscal policies have shown in Latin America in the 1970s and 1980s. These are challenges that 3