target. similarly, the differential between nominal and real yields on government bonds remains at levels above those observed in 2016, pointing to concern about the medium - and long - term evolution of inflation in mexico. furthermore, an environment of high uncertainty is likely to persist, especially in view of ongoing nafta negotiations and other potential actions by the us government, the normalization of monetary policy in that country, and the electoral process in mexico in 2018. therefore, the possibility of additional pressures on the peso stemming from these or other factors remains. also, the risk of second - round effects from the recent supply shocks, though contained thus far, has not disappeared. under these circumstances, a cautious implementation of monetary policy is warranted. what lessons can be learned from the recent mexican experience? first of all let me say that any comments in this regard should be considered as preliminary, since the process of adjustment to the challenges faced has not concluded. it should also be kept in mind that the experience of one country cannot automatically be considered as suitable for other economies. with these caveats in mind, i would underline the following : 1. inflation targeting has been an efficient framework for the implementation of monetary policy in mexico under the present conditions of the world economy. 2. a timely and well measured response of monetary policy to inflationary pressures is essential to minimize the policy effort. in other words, the cumulative increase in interest rates required to contain upward pressures on inflation will be larger if the initial response is tardy or insufficient. 3. central banks will frequently need to deal with inflationary pressures in the face of a weak gdp growth. the costs for economic activity of monetary policy actions have to be seen against the counterfactual. indeed, such costs will be higher in a scenario where second - round effects on prices arise. on the other hand, the definition of the time span over which convergence to the inflation target will be sought is a crucial element. 4. the exchange rate may have a significant effect on domestic prices in economies with large foreign trade sectors. it is not possible to say a priori if this justifies a monetary policy action. however, it will always be important to keep in mind that the size of the pass - through coefficient can be closely linked to the monetary policy reaction, and that after a certain stage depreciation of the currency may have non - linear effects. 5. a change in relative prices does not normally justify a monetary policy response. however, depending on their

remarks by mr. javier guzman calafell, deputy governor at the banco de mexico, at the panel of central bank governors on “ new challenges for central banks in latin america ”. seminar on financial volatility and foreign exchange intervention organized by the central reserve bank of peru and the interamerican development bank. cusco, peru, july 25, 2017. 1 the central banks from emerging market economies ( emes ) have faced a challenging external environment in recent years. the monetary policies implemented by the advanced economies after the global financial crisis, combined with episodes of turbulence in highly integrated international financial markets deriving from a combination of factors, have resulted in substantial volatility of capital flows. in addition, emes have confronted a world economic environment characterized by lower rates of global potential growth, a decline in commodity prices, a growing anti - globalization sentiment and events of a geopolitical nature. the combination of these factors has led to a situation of acute uncertainty. if this were not enough, the global financial crisis has eroded confidence on our understanding of the economics science and of the proper way to implement monetary policy under current circumstances. the mexican experience of the last couple of years provides an illustrative example of the nature and magnitude of the challenges that our central banks have faced. since mid - 2014, the country has been hit by a combination of external shocks. to a significant extent, the current evolution of the economy the opinions and views expressed in this document are the sole responsibility of the author and do not necessarily represent the institutional position of the banco de mexico or of its board of governors as a whole. has been determined by the impact of these shocks and the economic policy that has been implemented in response to them. let me refer briefly to the most important : 1. the price of the mexican crude oil basket fell from around 100 dollars per barrel in june 2014 to some 45 dollars per barrel at present. although the share of oil in exports and gdp is relatively modest, it accounts for a substantial share of public revenues. therefore, these developments have had significant implications for public finances. in fact, when the impact of the concurrent reduction in oil prices and output is taken into consideration, the result is a decline in annual public revenues from this source of approximately 5 percent of gdp since 2012. 2. after a prolonged period with near - zero interest rates, the us federal reserve began to increase the target for the federal funds rate in late 2015. while this shock affects emes in general,