manuel sanchez : the impact of monetary policies of advanced countries on emerging markets remarks by mr manuel sanchez, deputy governor of the bank of mexico, at the 55th annual meeting of the national association of business economics, san francisco, 9 september 2013. * * * i am honored to participate in the annual meeting of the national association of business economics. thank you for inviting me to speak on the implications of monetary policies of advanced countries for emerging markets. as you know, this topic is at the heart of policy making in most central banks today. the monetary expansion undertaken in developed countries in recent years has no parallel in history, and its repercussions, already significant, are still to unfold in full. moreover, recent indications by the u. s. federal reserve that it might soon start unwinding its unconventional policies have raised a host of questions regarding the characteristics of this and the following stages of its overall exit strategy. as a consequence, the financial boom emerging markets enjoyed during previous years stemming from lax monetary stances in industrialized countries has begun to be displaced by tighter financial conditions and increased uncertainty. from the beginning, not all emerging economies were affected equally, and this will likely continue to be the case in the future. but for the sake of simplicity, i will try to comment and conjecture on general trends in these countries, without neglecting international differences. specifically, i will organize my remarks as follows. first, i will examine the effects of expansionary monetary policies of the main advanced economies on emerging - market countries ; second, i will discuss the implications of the recent change in market sentiment ; and third, i will identify some policy challenges faced by emerging economies in dealing with this rapidly changing international environment. previous financial boom from the outset of the big financial crisis, the central banks of major industrialized countries have implemented a variety of unconventional policies, first, to restore confidence in financial markets and, later, to boost economic growth. the leader in these efforts has been the u. s. federal reserve, which widened its liquidity facilities significantly and, by the end of 2008, reduced its policy interest rate to near zero. afterwards, the fed began purchasing financial assets from the market, notably treasury bonds and mortgage - backed securities, in successive programs referred to as quantitative easing ( qe ). also, it has provided forward guidance expressing its intention to maintain the fed funds rate near zero for an extended period of time, conditioned on certain parameters related to unemployment and inflation expectations. these policies seek

##prudential measures. yet we should not overestimate their effectiveness. in my view, monetary policy cannot close its eyes to financial stability, as suggested by those purists who favour a strict “ principle of separation ”. instead, i favour a form of intelligent coordination, and that will be one of the challenges for our next strategic review. monetary policy must remain accommodative but it also has to be more attentive. the necessary follow - up with fiscal and structural policies the second limitation is again a humble truth. as we have seen, monetary policy has gone beyond the call of duty. but it is not – now less than ever – omnipotent, and it cannot perform miracles. monetary policy has no influence page 13 of 14 over the structural changes that are behind the exceptionally low level of the natural interest rate. to fix the euro area ’ s investment dearth – both in the private and public sector – relative to its savings surplus, structural growth policies are needed that boost innovation and productivity. it also means making more appropriate and differentiated use of fiscal policies. in this regard, the euro area is underusing its fiscal space : its public debt ( 84 % ) and deficit ( 0. 9 % ) are lower than those of the united states ( 106 % and 5. 6 % ) or japan ( 238 % and 3 % in 2019 ). source : imf fiscal policy, especially in those european countries with a surplus, needs to be exploited more actively and selectively. germany has opened the debate ; the netherlands have shown the way with the announcement of the creation of an investment fund for the future. low rates, here and elsewhere, can provide an opportunity to finance investments if – and only if – those investments deliver increased potential growth : the ecological transition, digitalisation, education and research. for that, we need – finally! – to focus our fiscal debate on the quality of our spending and investment, and not just on its quantity. at the european level, we have considerable borrowing capacity : we should use it, as soon as we know how to choose these priorities properly, beyond the success of the juncker plan or of investeu. * * page 14 of 14 i shall conclude with a more “ philosophical ” consideration : interest rates are also the price of time. my generation created the euro and tried to tackle the financial crisis. yours is inheriting a world that is equivocal, to say the least : the positive explosion of