. notwithstanding a sharp banking and balance - of - payments crisis early in the decade, inflation in chile averaged less than 20 percent in the 1980s, compared with rates of about 350 percent in argentina and 265 percent in brazil. the achievement of price stability in the 1990s after so many years of failed stabilization attempts, an observer in 1990 might have been forgiven for concluding that low and stable inflation would remain elusive in latin america. but during the subsequent decade, better economic analysis and better policies led to far - better outcomes on the inflation front, as i have already noted. what accounts for this remarkable change? worldviews tend to evolve slowly, and it is far too soon to claim that ideas and politics in latin america have changed fundamentally or irrevocably. nevertheless, during the past fifteen years or so, both the political elites and the broader public in the region have, for the most part, shown an increased willingness to abandon the failed economic models of earlier decades in favor of new approaches that emphasize improved fiscal discipline, the benefits of free trade and free markets, and the vital importance of building strong economic institutions. the visible success of more market - oriented development strategies, notably the examples of the " east asian tigers " and ( closer to home ) of chile, was not lost on latin american policymakers. in addition, to restructure external debts and restore access to international financial markets, countries necessarily faced outside pressure to improve their policies, both from multilateral institutions and from the discipline of market forces. the conquest of inflation in latin america is a particularly interesting case study of the beneficial effects of the new thinking, although, as we shall see, success came only through persistent experimentation. after the debacles of the late 1980s, the view that inflation - particularly very high inflation - carries significant economic costs became more widely accepted, supported by empirical analyses and accumulated experience ( khan and senhadji, 2001 ). in the early 1990s, consequently, many latin american countries attacked their inflation problems with a new energy. initially, a common tactic was to fix the exchange rate, in the hope that an exchange - rate peg might stabilize inflation expectations and help to " import " some necessary monetary discipline. the use of fixed exchange rates was reminiscent of the earlier heterodox programs, although in the more market - oriented programs of the 1990s, wage - price controls and similar restrictions were generally not employed. this approach enjoyed some early successes. for example, mexico maintained a pegged exchange rate from 1987

greater investor receptivity, corporate bond issuance has been strong. many markets are functioning more normally, with increased liquidity and lower bidasked spreads. equity prices, which hit a low point in march, have recovered to roughly their levels at the end of last year, and banks have raised significant amounts of new capital. many of the improvements in financial conditions can be traced, in part, to policy actions taken by the federal reserve to encourage the flow of credit. for example, the decline in interbank lending rates and spreads was facilitated by the actions of the federal reserve and other central banks to ensure that financial institutions have adequate access to shortterm liquidity, which in turn has increased the stability of the banking system and the ability of banks to lend. interest rates and spreads on commercial paper dropped significantly as a result of the backstop liquidity facilities that the federal reserve introduced last fall for that market. our purchases of agency mortgage - backed securities and other longer - term assets have helped lower conforming fixed mortgage rates. and the term asset - backed securities loan facility ( talf ), which was implemented this year, has helped restart the securitization markets for various classes of consumer and small business credit. earlier this year, the federal reserve and other federal banking regulatory agencies undertook the supervisory capital assessment program ( scap ), popularly known as the stress test, to determine the capital needs of the largest financial institutions. the results of the scap were reported in may, and they appeared to increase investor confidence in the u. s. banking system. subsequently, the great majority of institutions that underwent the assessment have raised equity in public markets. and, on june 17, 10 of the largest u. s. bank holding companies – all but one of which participated in the scap – repaid a total of nearly $ 70 billion to the treasury. better conditions in financial markets have been accompanied by some improvement in economic prospects. consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated. businesses have continued to cut capital spending and liquidate inventories, but the likely slowdown in the pace of inventory liquidation in coming quarters represents another factor that may support a turnaround in activity. although the recession in the rest of the world led to a steep drop in the demand for u. s. exports, this drag on our economy also appears to be waning, as many of our trading partners are also seeing signs of stabilization