martin redrado : institutional framework and economic growth speech by mr martin redrado, governor of the central bank of argentina, at the bank of mexico international conference, mexico city, 19 october 2009. * * * institutional framework and economic growth is a most challenging topic. institutions are increasingly relevant to economics and they bear an incontestable relation to growth. in turn, the world is undergoing institutional financial architecture reconstruction to resume the sustainability path. i think, therefore, that this topic could not be timelier. let me focus on the institutional progress made by emerging markets and, in particular, by latin america. here we can make a distinction. on the one hand, we have what i consider to be new macroeconomic institutions in our region, which had distinctive effects both on the growth process of the past few years and on the economic policy responses to the crisis. on the other, in the microeconomic reform agenda, the region is structurally lagging behind, and recent progress has been more mixed. in this sense, i will specifically refer to one of the main institutional reforms across both the macro - and microeconomic areas – the strengthening of local and regional currencies, the development of finance markets in those currencies, and the growing importance of such currencies for regional integration. the new macroeconomic paradigm in latin america has been built upon the lessons from our history of macroeconomic volatility, and still needs to consolidate itself definitively finding the right balance between credibility and flexibility. while there are several ways to implement it according to the specificities of each country, the basic principles – which, in my view, have already been institutionalized – can be summarized into five pillars : ( 1 ) robust monetary and financial policy approaches, ( 2 ) more flexible exchange rate regimes, ( 3 ) fiscal solvency, ( 4 ) external sustainability with market openness, and ( 5 ) financial policies that favor the creation of liquidity and solvency buffers. our monetary and financial policy options are part of an extensive review of the importance central banks should assign to the various goals set, particularly, what role and weight should be given to price stability, output stability and financial stability. in my opinion, the monetary policy paradigm is changing following the present crisis – financial stability has come to play a role it has never played before in the central bank agenda worldwide : it is no longer taken for granted, but needs to be sought and defended every day. this is happening nowadays in developed

the money demand and stabilize the foreign exchange market. then, with simple instruments, we ensured liquidity provision to guarantee systemic stability. finally, we implemented an array of measures including reforms on the markets for central bank securities, the development of additional mechanisms for liquidity provision, changes to enhance futures market depth and transparency, and instruments to facilitate supply of foreign currency. our system worked as a dam to the rest of the economy, providing for the first time in decades monetary and financial stability. so in my view, there is a need to rethink the paradigm for central banks so that we have the tools to provide monetary and financial stability. now let me move from the national level to the global one. in this instance a more sophisticated supra - national framework is urgently needed to deal with financial stability. any roadmap should have at least the following ingredients : i ) greater convergence in financial regulation and supervision standards among countries ; ii ) rethinking the role of the imf ; iii ) reinforcement of macro - prudential supervision and regulation tools ; iv ) reformulation of asset valuation methods ; v ) avoidance regulatory arbitrage and control of shadow banking system ; vi ) redefinition of the credit rating agencies function. current events show that cross - border banking operation has both systemic and macroeconomic consequences domestically and internationally. this calls for coordinated actions between national authorities together with a more aggressive “ stepping up ” from international financial institutions. let me be very clear : the international architecture is in desperate need of a “ guardian ” for global financial stability. this is, of course, a well - suited role for the imf given its global reach and infrastructure. so far, the imf has announced a series of measures, which revisited its traditional credit practices and created new credit lines, such as the flexible credit line ( fcl ) and the exogenous shock facility ( esf ). these are welcomed steps but also “ baby ” steps. as long as a comprehensive set of products for different countries with different particular needs is not developed, any attempt to perform this role effectively would fall short. the imf should have the fire power to deal with global events but should also have the proper equipment. this means making available instruments to ensure the adequate circulation of liquidity worldwide. this may include : short - term credit for liquidity purposes for central banks tailored to the specific needs of the country, guarantee schemes to develop a particular domestic credit market and a variety of products for