XV Meeting of Monetary Policy Managers
CEMLA and the Central Bank of the Dominican Republic.
In many respects the Global Financial Crisis (GFC) was a watershed. It meant reconsidering some long-standing views in economics. The main Advanced Economies (AEs) faced substantial policy challenges, particularly so as it became clear that they would face the zero-lower-bound. Thus, AEs´ economic policy had to navigate unchartered waters. Initially, unconventional monetary policies (UMPs) involved buying long-term bonds (as in the quantitative easing programs) to affect the long end of the yield curve, mostly through the term premium. Afterward, UMPs entailed announcements (as forward guidance), indicating the conditions under which the policy rate would be modified. This was mainly through expected interest rates. AEs´ monetary policies (MPs) led to substantial capital flows to emerging market economies (EMEs).
Most EMEs fared well during and after the GFC. However, they faced significant policy challenges. As capital flow levels and volatility increased, beyond MP, they also opted for international reserves, foreign exchange (FX) and/or macroprudential policies. Self-insurance has been the main rationale for international reserves accumulation. An EME with a floating exchange rate (ER) likely observed an ER appreciation and a perceived loss in competitiveness. On the other hand, an EMEs with a fixed ER 'imported' the AEs´ monetary accommodation, which could had been problematic depending on the EME´s phase of the business cycle. Some EMEs implemented macroprudential policies, mitigating systemic risks arising due to capital flows. Such policies were mostly used complementarily to MP. All in all, in the years following the GFC there were heated debates concerning the appropriate response to the increase in capital flows. Consider the following two cases: Capital Flow Management (CFM) (IMF, 2012 and 2018a) and the validity of the Trilemma (Rey, 2015). With CFM, the IMF changed its historical stance on the matter. Similarly, enquiries on the trilemma question a long-standing result in international economics.
The 'Taper Tantrum' episode set off substantial capital outflows from EMEs. Since then, US monetary authorities have articulated their policy strategy more clearly. EMEs´ policy makers turned their attention to dealing with capital outflows. During this episode, and the years after, the debate on capital controls gained much relevance.
During the past decade, the global environment has been characterized by the perception of weakened potential economic growth, low nominal interest rates and, seemingly, close to no inflationary pressures in AEs. These conditions have intensified the search for yield in EMEs. In addition, we have less understanding of the US business cycle. Significant changes in the ways financial markets operate have taken place, in particular, the size and concentration of Global Asset Management (GAM) Companies. These factors and the rise of algorithmic trading, among others, have made herd-like behavior among global investors more likely. The interaction of these elements has led to high and volatile capital flows.
EMEs´ outlook is challenging. The Federal Reserve Board recently reduced its policy rate, for the first time since December 2008, citing global developments for the economic outlook and subdued inflation pressures. Further factors, such as the possible exacerbation of a trade war, could add to an already complicated setting.
As mentioned, the main objective of the meeting is to gain a better understanding of how monetary policy managers from the central banks in the region have dealt with, and their views on, the aforementioned policy issues and challenges.
The main objective of the meeting is to gain a better understanding of how monetary policy managers from the central banks in the region have dealt with, and their views on the policy issues and challenges as described above.
This event is targeted at officials from CEMLA member central banks and other invited institutions with responsibilities related to monetary policy design, implementation, and analysis.
Dr. Santiago García Verdú
Phone: +52 (55) 5061 6635
Cid Alonso Rodríguez Pérez
Phone: +52 (55) 5061 6630