##ub and sufi ). perhaps an even more important challenge for monetary policy, is to fully understand and assess the persistent downward pressures this context exerts on the natural interest rate. 3 for emerging markets, both global and idiosyncratic risk factors could increase monetary policy tradeoffs faced by central banks, thus, requiring a prudent approach. in particular, the role of monetary policy in smoothing the business cycle in small open emerging markets, which are highly integrated into global financial markets, implies additional challenges. for emerging markets ’ central banks, in addition to the usual cyclical considerations about inflation and output gaps, there is a need to consider external and internal determinants of inflation, which include the interaction of global risk appetite and the effects of idiosyncratic risk factors on capital flows and financial stability. let me illustrate the mexican experience over the last few years. in the context of an open capital account and a flexible exchange rate regime, a cautious approach of monetary policy in mexico has allowed to address a mian, a., straub, l., & sufi, a. ( 2019 ). indebted demand. unpublished. series of shocks that led to an environment of uncertainty and higher risk premia. among the aforementioned shocks the following stand out : i ) a permanent reduction in oil prices in the second half of 2014 ; ii ) a contraction of domestic oil production ; iii ) trade - related uncertainty ( from nafta to usmca ) ; iv ) tighter ( or less accommodative ) monetary policy in the us, and v ) idiosyncratic risk factors ( mexico specific ). this complex environment required a considerable real - exchange rate depreciation, of around 30 %, which previously had only taken place under a severe balance of payments crisis and high, double digit inflation episodes. in this context, monetary policy was tightened to allow for an orderly adjustment of the economy and domestic financial markets. thus, the policy response to these shocks helped to avoid disorderly adjustments in the fx markets and second round effects on the price formation process. in spite of the significant depreciation of the currency, the pass - through to prices remained at low levels, reflecting an efficient functioning of the economy ’ s nominal system. in the second half of 2019 and early 2020, as inflation moved towards the target with an increasing output gap and looser global financial conditions, monetary policy has reduced the target interest rate in the last 5 meetings. central banks and

but this could change as the global interestrate scenario develops. in this context, difficult investment decisions will need to be made. how to adjust asset allocations to evolving monetary normalization is a key question. should investors prefer a more risk - off, conservative stance, or hold tight and take a longer view, in which they have to tolerate greater volatility? how can they become more agile in the way they incorporate new information, modify their expectations, and make decisions? related to these questions are the investment time horizon and the definition of an optimal portfolio. in general, asset managers attempt to use targeted optimization models based on historical data. but history is not necessarily a good predictor of the future. bis central bankers ’ speeches a complicating issue is that in periods of stress, asset correlation is greater. indeed, recently, the assets that appeared likely to offer the benefits of diversification have performed in a way similar to that of other instruments. 1 these challenges are present in all economies. long positions in fixed - income assets anywhere in the world are bound to result in losses for investors as yields in advanced economies normalize. alternative strategies in equity or other real - sector assets could also suffer as financing costs increase worldwide. finally, currency risk is also likely to rise in many countries. emerging economies may face particular difficulty given high weights for their assets in international portfolios. currently, there is much discussion on whether it makes sense to participate or not in these countries from a risk - return perspective. in general, there are fears that eventual monetary normalization in the united states will affect all emerging economies as an asset class, but some nations are more prepared for the scenario than others, as always. 2 the situation of emerging economies may become even more complicated in the face of possibly slower recovery in the eurozone and lower growth in china, which might drag commodity prices down even further. this would be particularly daunting for many commodity - exporting countries. the challenges for financial authorities in emerging markets what should monetary and financial authorities in emerging markets do to prepare their economies for a rapidly complicating environment, given likely near - term gradual monetary normalization in advanced nations? they have at least two complementary policy avenues. one is to pre - emptively make their economies more resilient to shocks by strengthening macroeconomic and financial fundamentals. possible measures include improving the fiscal position, controlling inflation, and performing the delicate balancing act of bolstering financial regulatory and supervisory frameworks