alejandro diaz de leon : remarks at a panel discussion on monetary policy challenges for emerging markets remarks by mr alejandro diaz de leon, governor of bank of mexico, at the s & p global ratings global emerging markets virtual conference 2021, central banks panel discussion : monetary policy challenges for emerging markets, 1 july 2021. * * * i. lessons learned by economic policy makers in emes from the pandemic the covid - 19 pandemic has been a human and economic crisis like no other. the novelty of covid - 19 and the tremendous uncertainty around the evolution of the pandemic made this crisis unique on several dimensions. it posed new challenges for policy makers, as we dealt with acute and persistent volatility in our financial markets. a deep economic contraction with a subsequent heterogeneous economic recovery, and currently with a high degree of uncertainty on inflation dynamics. our economic models and analytical tools were not designed to analyze crises like the present one, whose origin lies in a public health problem and not in the economic or financial cycle. in what follows, i would like to list several lessons along these lines. as central bankers, the first lesson was to address the financial shock and risk aversion spiral in a timely and decisively matter, to prevent a financial crisis. the financial shock hit during the first weeks of the pandemic, and it was necessary to adopt measures to restore an orderly functioning of financial markets. it is important to remember that, since their creation, central banks have had the responsibility of safeguarding the stability of the financial system. in their role as lenders of last resort, central banks have historically focused on providing liquidity to commercial banks. however, the development of increasingly complex and interconnected financial markets has posed new challenges for central banks. we had to design our policy response taking into account the new realities of our financial systems. this time the resilience of domestic financial sectors to adverse shocks, along with the liquidity provided by systemically important central banks, proved to be very important to stabilize international financial markets. in the case of mexico, the governing board embarked on a series of interest rate cuts and implemented a series of measures to provide ample liquidity ( up to 3. 3 % of gdp ), within its legal mandate in order to foster an orderly functioning of domestic markets and strengthen the economy ’ s credit channels. all measures were intended to set the conditions so that financial intermediaries could fulfill their primary function of providing financing to the economy

the pandemic shock that are short - lived from those that are longer - lasting. this increases our forecast errors and has significant implications when assessing the appropriate monetary policy response. ii. how would you compare the policy reaction vis - a - vis previous global crises central banks around the globe adopted a myriad of measures to counteract the financial instability and liquidity strains derived from the unprecedented disruption associated with covid - 19. moreover, central banks restored liquidity to the financial markets by providing liquidity - enhancing measures through existing facilities. some emes used unconventional monetary policy measures for the first time, embarking on government bond purchases, and in some cases undergoing necessary reforms to eliminate legal restrictions. even though in the first phase of the crisis central banks had to respond swiftly to avoid bad equilibriums and stabilize markets, i believe we should not over - emphasize the so - called “ market maker - of - last - resort ” narrative. we should not overemphasize our role as a potential buyer of local currency or domestic securities, otherwise we run the risk of amplifying the adjustment process, as we would attract more short - term investors and market players would internalize a “ trigger - happy ” reaction function. we should worry less about palliatives. as emes, we need to stay on course to achieve a stronger, deeper, and more sustainable integration in global trade and financial markets. i believe that, in many instances, emes narrative is crowded by the different range of second 2 / 3 bis central bankers'speeches or third best options available : i ) fx interventions, ii ) the duration of buyer - of - last resort on domestic bonds, and iii ) even capital flow management measures, which are better known as capital controls. ems need to move out of a bad equilibrium of : i ) illiquid fx market, ii ) influential fx interventions, and iii ) domestic financial institutions and corporates ’ unable to withstand large fx swings ; and move towards a better equilibrium of : i ) deep and liquid fx markets that could work as a shock absorber, ii ) less relevant fx interventions, and iii ) financial institutions and corporates resilient to tail - risk fx swings. in terms of policy recommendations, even under the effects of covid - 19, we should remain on course, implementing the necessary policies to achieve more developed markets and avoiding second and third best options. 3 / 3 bis central bankers'speeches