henrique meirelles : brazil - argentina local currency payment system speech by mr henrique meirelles, governor of the central bank of brazil, at the inauguration of the brazil - argentina local currency system, buenos aires, 2 october 2008. * * * it is an honor to attend today the launching of the brazil - argentina local currency payments system ( sml ). i am certain that this initiative will be a watershed in the bilateral relations between the two nations. coincidentally, the new system kicks off in a period of financial turmoil and liquidity crunch in international trade, in which cooperation among central banks becomes fundamental to facilitate trade and to deepen economic ties. central banks are responsible for ensuring adequate international payments systems. in processes of economic, financial and trade integration, the objective is to establish an efficient payments structure for intra - regional transactions. when flexible and unobstructed payments systems are available, trade transactions flow with greater ease and lower costs, and financial flows tend to intensify. this is what we expect from the new sml system. initial obstacles have been overcome. the mechanism of the sml will trigger significant changes in the way in which companies export and import. in brazil, exporters may now operate in real, while argentine businesspeople may operate in pesos. each one of our countries established a consistent framework for management of the system. the priority was to create a secure arrangement that will provide both exporters and importers with a simplified way to settle their transactions with a degree of ease similar to that with which they effect payments within their own countries. from this point forward, there is no doubt that the private sector will take it upon itself to create new financial products and further deepen the real - peso market. indeed, deepening of the real - peso market, reduction of trade obstacles and access on the part of small and medium exporters are the primary objectives of this initiative. despite noncompulsory, the facilities and lower costs of the sml should attract exporters and importers. there will be no foreign exchange contracts, despite documentation currently required will remain mandatory. the essential alteration for brazilian exporters will be the need to register the operation in real. with elimination of a third currency in direct transactions among companies, exporters will set their prices in the currency of their own countries. thus, they will be better able to calculate their margins precisely, since they will no longer be exposed to exchange rate risk. at the start,

price stability ; and macroprudential policy would be used to mitigate financial systemic risk. another direction is to ask whether monetary policy should explicitly incorporate a financial stability objective, and be more proactive in response to perceived risks to financial stability. therefore, in considering the role of monetary policy in addressing financial stability, this direction would consider new policy - reaction rules for central banks that would be augmented to include a financial or credit gap argument of some sort. we are certainly in brazil – but also elsewhere – reflecting about these analytical lessons from the crisis. due to our history of greater volatility, emerging market economy central studies from an emerging market perspective include imf ( 2013a ) and agenor and pereira ( 2013 ). bis central bankers ’ speeches banks such as brazil ’ s never relegated financial stability concerns to a secondary status. our inflation targeting framework had always been complemented by strong financial sector regulation and prudent foreign exchange policies. to be fair, very pragmatically, in the post - crisis environment of unprecedented global liquidity, emerging markets somehow implicitly used this separation principle : we used macroprudential policies in order to counteract the effects of intense and volatile capital flows on credit and asset markets ; and this allowed monetary policy under the it regime to maintain its focus on price stability. however, this pragmatic policy mix might be effective, but is not without costs, especially because we still do not fully know how some of these macroprudential tools work4. that introduces important issues of credibility for central banks and poses challenges for the formation of expectations about the yield curve that are critical for monetary policy. therefore macroprudential policy, particularly measures that target capital flows, combined with traditional monetary policy creates significant communication challenges for central banks. in this respect, macroprudential policy can easily be misconstrued, obscure policy intentions and distort expectations. concluding remarks allow me to conclude by drawing some general lessons from this quick overview of central banking for emerging markets in the post - crisis global economy : ( a ) the judicious use of macroprudential tools can provide an additional degree of freedom to conduct monetary policy aiming at price stability at home while preserving financial stability ; ( b ) the debate will have to continue regarding the ways to ensure that the complementarity between the two instruments does not confuse and undermine market confidence ; and ( c ) the importance of making progress in developing a framework for financial stability policy is paramount. this