fx ) mismatches in balance sheets of the government, banks, or corporations. second, procyclical fiscal and monetary policies that amplify external shocks. in such cases, even a mild external shock can push economies to the brink of recession. ∗ i thank the comments and suggestions in preparing this note to elias albagli, miguel fuentes, and carlos medel. in short, domestic weaknesses interact with global financial attitudes in a dangerous mix that has historically proven to be highly destabilizing for emes, compared to aes. still, this characterization is based on very crude generalizations ; in reality, emes spread over a broad range of possibilities for each dimension and different combinations of them. the question is then to what extent does such variety of cases make a difference for the spillover from changes in global financial conditions and what role does the exchange rate ( er ) play in it. how important are global financial and business cycles to emes compared to local ones? to address this issue from an eme ’ s perspective, a first question refers to the relative importance of externally - induced shocks as compared to purely domestic ones. even if the global financial cycle were a very powerful force, as long as countries can still get into troubles of their own, macro policy, including the er regime, may make an important difference. a review of the last 40 years of economic history reveals many episodes during which cyclical turning points originated in domestic, rather than foreign, shocks. in latin america in particular, many of the major shocks of the 1980s, 1990s, and early 2000s originated locally, usually from misconceived policies, private sector exuberance, or inadequate regulations. the fact that these shocks showed up as large current account deficits surely reflects the degree of dependence of governments and business on external funding, but that does not exempt local conditions from being the main source of the imbalances. in particular, a classical latin american and caribbean countries ( lac ) crisis would show up as an unsustainable disequilibrium between public, private, or foreign savings and investment partially contained by some form of fx control, which turns into a major economic and financial crisis once the currency devaluates. abundant foreign capital may help prolong the situation for a while, but only to make the inevitable turnaround more damaging. it is important to underscore the role of domestic er policies. during the upswing, central banks in emes often try

4, p. 23, 30 april. bis central bankers ’ speeches the lower bound and non - standard measures monetary conditions depend not just on short - term rates, but on the entire range of market interest rates. indeed, when the central bank alters short - term rates it is aiming to steer the medium - to long - term rates that determine investment and consumption decisions in the real economy. an inability to cut short - term rates even more does not therefore make monetary policy ineffective if other tools are available that can influence the shape of the yield curve. at the extreme, one could argue that the true lower bound for monetary policy is reached only when the entire yield curve is flat at the effective lower bound. this is where non - standard measures come in. non - standard measures are a variant of standard monetary policy that utilises different instruments, intermediate targets and communication devices to achieve the same final objective, namely maintaining price stability over the medium term. following a version of the tinbergen principle, we can view non - standard measures as assigning a large array of instruments – asset purchases at different maturities – to a correspondingly large set of intermediate targets, i. e. the corresponding market interest rates. the effective lower bound for monetary policy should be seen in this functional space, and not along a one - dimensional line. through this expanded set of instruments, we are able to exert direct influence on many long - term interest rates, rather than only control a very - short term interest rate on banks ’ reserves. this view puts into a different perspective models and model - based simulations aiming at assessing stabilisation policies when monetary policy is constrained by the lower bound. in standard dsge simulations, the zlb is captured by the policy rate being non - negative at each point in time along the future path of the economy. but taking into account the possibility for monetary policy to exert influence on longer - term interest rates would lead to a more benign assessment of the impact of the lower bound on, say, the size of fiscal multipliers, or on the welfare impact of structural reforms. 3 we have two main instruments to flatten the yield curve across the full spectrum of maturities. the first is forward guidance, which works both by anchoring expectations about the level of future short - term rates, and by reducing the volatility around that level. however, forward guidance is only credible over the horizon of visibility of the monetary policy committee. if the central bank intends