javier guzman calafell : global divergences - implications for latin america remarks by mr javier guzman calafell, deputy governor of the bank of mexico, at the 2016 institute of international finance ( iif ) latin america economic forum, organized by the iif with the sponsorship of mercantil servicios financieros, during the session on “ global divergences – implications for latin america ”, nassau, bahamas, 9 april 2016. * * * the views expressed in this document are strictly personal. let me start by thanking the organizers for the kind invitation to participate in this interesting discussion. while different paths for the main macroeconomic and financial variables across countries and regions are a normal characteristic of the world economy, divergence has become one of the major subjects of concern more recently. the most important feature in this regard is the observed and expected decoupling of monetary conditions and policy cycles in the main advanced economies, with the united states having recently initiated a rate hiking phase, on the one hand, and japan and the euro area still implementing ultra - accommodative monetary policies with the perspective of further easing, on the other. monetary policy divergence in the advanced economies is the ordinary result of different economic cycles and the efforts of the corresponding central banks to comply with their mandates. in fact, as would be natural to expect, divergence has been a frequent trait of previous policy cycles in advanced economies. to the extent that these policies are implemented efficiently and as required by current and expected conditions, they should be beneficial for the world economy. furthermore, unsynchronized economic and monetary policy cycles in advanced economies would in principle tend to make life easier for emerging market economies, since some of the negative spillovers could be at least partially offset. with this in mind, why is divergence such a source of anxiety this time? in my view, the answer lies in a combination of factors. first, monetary policies in advanced economies have major spillover effects. in particular, asynchronous monetary policies have important implications for the behavior of exchange and interest rates in these countries and, given their systemic role at the global scale, in the rest of the world. the accompanying volatility in asset prices and capital flows is accentuated by the presence of financial market imperfections. the situation looks even more complicated when the insufficient understanding of global monetary policy spillovers is taken into consideration. second, with globalization and in particular the push for less restricted capital

movements in many economies, cross - border financial linkages and therefore international spillovers of monetary policy in the advanced economies have increased. for instance, in a recent study the bis concludes that the sensitivity of emerging market local currency yields to bond yields in the us has accentuated over time, with potential of spillovers from us long - term treasury bonds larger at the end of 2015 than during the “ taper tantrum ”. 1 third, in a situation of global uncertainty resulting from concerns about the strength of the world economy, subdued world trade, low commodity prices, tightening international financial conditions, and problems of a geopolitical nature, among others, the volatility of capital flows and unease about the implications for exchange and interest rates resulting from monetary policy divergence further accentuate the perception of risk. 1 bank for international settlements, uneasy calm awaiting lift - off, bis quarterly review, december 2015. bis central bankers ’ speeches fourth, the causes of policy divergence themselves have been a source of apprehension. this includes discomfort about the potential impact of the normalization of monetary policy in the united states on emerging market economies, as well as doubts about the underlying strength of the us economy and therefore the justification to increase interest rates in this country. the situation is worsened by the growing perception that monetary policy is reaching its limits, and results from monetary policy actions that sometimes run counter to expectations, as shown by the recent appreciation of the yen and the euro following a relaxation of the monetary stances by the corresponding central banks. fifth, the extent to which divergence may provide some breathing space for emerging market economies may not be wide, given the dominance of the us dollar in international financial markets. it may be useful to note in this respect that according to imf estimates, the share of total variation in domestic bond yields in the five largest latin american economies attributable to us shocks is twice the share corresponding to euro area shocks. 2 sixth, vulnerabilities in emerging market economies have become increasingly evident. this has been partly the result of external factors, commodity price declines and tighter financial conditions particularly important among them, which have put pressure on both external and fiscal accounts. however, problems of a domestic origin have also played a prominent role in some economies. in this context, economic activity in this group of countries has decelerated for five consecutive years and prospects are bleak. is monetary policy divergence likely to persist? the possible evolution of policy divergence among advanced economies is subject to some