The role of Central Banks in present times. Monetary and exchange rate
policies in the Mediterranean countries
IEMED Conference/Barcelona
Luis M. Linde
Governor

In this first session of the Conference, we will address the implications of the present
situation of the global economy for central banks and, more specifically, how should central
banks in the Mediterranean region manage their monetary and exchange rate policies in the
present context.
Before giving the floor to our distinguished speakers let me say a few words about the global
economic policy environment and the implications for monetary and exchange rate policies.
The latest data tend to confirm that the global recovery is firming, including in core advanced
economies, even if the rates of growth continue to be rather modest. Inflation is also coming
back.
In this context, and after the prolonged period of ultra-expansionary monetary policies that
goes back to the global financial crisis, we are witnessing what seems to be the beginning
of a shift in the policy mix in advanced economies, at least by now in the US, a shift towards
a normalization of monetary policy and a somewhat more expansionary fiscal policy.
But this change in the policy mix points to the end of the so far very relaxed financial
conditions at the global level; and this, in turn, may have adverse collateral consequences,
mainly in the domain of financial stability, in both advanced and emerging market
economies, especially if the change does not take place slowly enough. Indeed, the mere
expectation of the shift in the policy mix has been one important driver behind recent
increases in bond yields in mature economies and the appreciation of the US dollar. In the
same way, as highly accommodative monetary policies in major advanced economies
generated major challenges for policymakers in emerging market economies, the exit from
such policies can have important repercussions, as previous episodes of market volatility
confirm.
In this context, it seems relevant to address the issue of how central banks in the
Mediterranean region should cope with the potential spillovers from these policy changes
in advanced economies, taking into account the different monetary and exchange rate
strategies that they follow. Many countries in the South Mediterranean shore have
historically relied on stable exchange rates as the nominal anchor for monetary policy,
although some of them have moved or are moving towards more flexible exchange rate
regimes and inflation targeting frameworks, under the advice of international financial
institutions.
While there is no specific recommendation regarding the choice of the exchange rate
strategy and each country will need to weigh the pros and cons of pegging versus exchange
rate flexibility, we must be aware of the limitations that domestic policies have in dealing
with the spillovers from external policies and events. These are clear in the case of countries
with fixed exchange rates which, depending on the openness of their capital accounts, have
to accept the monetary policy stance of the reference country.
But countries with more flexible exchange rates are not shielded either. Although they can
disentangle their monetary conditions by allowing the depreciation of the exchange rate,
this would have side effects on inflation. And the likely swings in capital flows can have
implications for financial stability, as emerging market economies have repeatedly
experienced. Indeed, some of them have been forced to tighten monetary conditions in a
procyclical way to counter inflationary pressures, and have used their buffers of international
reserves and implemented macro-prudential and capital control measures in order to
preserve financial stability. In any case, tighter dollar funding conditions, in particular, are
challenging for emerging market economies with high levels of dollar denominated debt.
This is why it has been argued that the traditional "trilemma" in international finance (i.e., in
a financially integrated world it is impossible to have at the same time free capital mobility,
fixed exchange rates and independent monetary policy) has been transformed into a
"dilemma" by the existence of a so called "global financial cycle", whereby an independent
monetary policy pursuing domestic policy objectives (controlling inflation and promoting
growth) is possible if and only if the capital account is managed. In these conditions, sound
fundamentals and the use of traditional macroeconomic (fiscal and monetary) policies may
not be enough; authorities may eventually need also to resort to macroprudential and capital
flow management instruments to smooth financial cycles and capital flows.
Finally, another reflection from the recent experience goes to the central banks in core
advanced economies: the importance of better internalizing the global spillovers of their
monetary policy decisions. While it is not possible to coordinate monetary policies, given
the mandates of these central banks, they should consider the effects of their decisions on
the rest of the world in their decision making, as the spillovers have the potential to raise
financial instability problems in other countries, and the spillback effects will hit back on
their own economies.
Without further ado, we are honoured to have with us today three very experienced
representatives of the central bank community of the Mediterranean region to address these
issues:
Mr. Abdellatif Jouahri, Governor of the Bank Al Maghrib.
Mr. Mario Vella, Governor of the Central Bank of Malta.
Mr. Mustapha Kamel Nabli, Former Governor of the Central Bank of Tunisia.