manuel sanchez : evolving global challenges and policy options for latin america remarks by manuel sanchez, deputy governor of the bank of mexico, at the 2014 iif ( institute of international finance ) latin america economic forum, bahia, brazil, 29 march 2014. * * * it is certainly a pleasure to be invited to the stunningly beautiful brazilian coast to participate in the 2014 iif latin america economic forum. i would like to thank the institute of international finance for the chance to share some thoughts with you on the challenges and opportunities faced by latin america in the current economic environment. i will organize my remarks as follows. first, i will comment on the changing global context for emerging markets ; second, i will highlight some policy options that our countries may entertain to confront likely external financial headwinds ; and finally, i will make a few comments on the mexican economy. evolving global challenges two trends are particularly noticeable in recent world economic developments. the first is decreasing growth since 2010, especially for emerging economies, amid modest post - crisis global improvement. softening commodity prices and the economic deceleration of china have contributed to this tendency, affecting some latin american commodity exporters. in particular, grains and metals have seen moderately falling prices, if from high levels. the second trend is a reversal of fortune in global financial conditions for emerging economies. whereas in the wake of the great recession, these countries drew substantial capital inflows, especially portfolio funds, and saw the prices of their financial assets rise, in 2013, the tables turned. in particular, the expectation and eventual beginning of the tapering of asset purchases by the u. s. federal reserve sharpened global risk aversion. since may of last year, portfolio capital inflows to emerging economies, previously the darling destination for foreign funds, have contracted and in some countries, even become outflows. at the same time, the prices of many financial assets seen as risky have fallen abruptly. emerging - market bonds, equities and currencies were affected by the change in market sentiment. also contributing to lower asset holdings and values has been a weaker relative outlook for growth in emerging economies. however, not all countries have been treated equally. investors have differentiated among destinations according to macroeconomic fundamentals and prospects for economic expansion, among other factors. nations with large financial imbalances, whether internal or external, have been hit hardest, including countries in the latin american region. more recently, political tensions and uncertainty on the ability of some governments to

this would make it easier for a central bank to restore full employment when an economic slump occurs. the determination of an optimal target for inflation is a rather difficult endeavor which depends on the particular circumstances of each country. in my opinion, the adoption of an approach whereby the target is increased simply to ease the zero bound constraint on rates carries disadvantages that outweigh by far the possible merits. an increase of the target based on these grounds would imply not only higher levels of actual inflation, but also the potential undermining of hard - earned central bank credibility, and the resulting higher inflation volatility, greater difficulty to stabilize expectations and increases in risk premia. in addition, it is important to bear in mind that the zero bound problem is likely to emerge only under rare circumstances, while the inflation costs would be immediate. furthermore, recent see dale, spencer ( 2013 ), op. cit. see yellen, janet ( 2014 ) : “ monetary policy and financial stability ”, remarks at the 2014 michel camdessus central banking lecture at the international monetary fund, july. see blanchard, olivier, giovanni dell ’ ariccia, and paolo mauro ( 2010 ) : “ rethinking macro policy ”, imf staff position note no 10 / 03 ; and ball, laurence ( 2014 ) : “ the case for a long - run inflation target of four percent ”, imf working paper no 14 / 92. bis central bankers ’ speeches research based on parameter values consistent with us data has shown that increasing the target from 2 to 4 percent would result in net welfare costs, even after taking into account the reduced likelihood of monetary policy being constrained by the zero lower bound on nominal interest rates. 14 to sum up, while it is true that inflation targeting should be further adapted to take into account the lessons from the global financial crisis, it is also clear that this does not imply neither a substantial modification of its fundamental structure nor a question mark on the merits of this approach for anchoring inflation expectations. let me conclude by quoting two phrases from a couple of john murray ’ s articles on it, which in my view provide a splendid closing to what i have just said : “ perhaps inflation targeting will be supplanted by a new, and even more promising alternative. at the present time, however, there does not seem to be any obvious contender. for those who desire monetary policy independence, most of the other policy options have already been tried and found wanting ”. 15 “