their merits, but at the same time we should not overlook the fact for most of this century they experienced two very positive external shocks, namely very high commodity prices, and abnormally low external interest rates in the context of abundant liquidity. these led to a very rapid rates of economic growth. but emes seem to be facing a turning point this year, as rapid economic growth, induced by high commodity prices and ample liquidity, seem to be coming to an end. at the same time, and of tremendous importance advanced economies ’ ( ae ) central banks, having followed an extremely expansionary monetary policy, are in the process of starting the normalization of their monetary policy stance, which implies a more constrained liquidity and sharply higher interest rates. so the question is : in this new world, what are the challenges facing emes ’ central banks and what should be their response? the first challenge for emes ’ central banks is not to drop the ball as they pursue their main mandate of keeping inflation under control. in emes it is relatively easier for inflation to spin out of control, even though most countries in this category have autonomous central banks. but these institutions are young, and their credibility is fragile. so the bis central bankers ’ speeches challenge is to resist the pressures to become overburdened with multiple mandates ; in particular, emes ’ central banks should not play a very active role in applying countercyclical monetary policies. countercyclical monetary policies should be applied as one should drink tequila : in moderation. second challenge : financial stability is a precondition for a conventional, simple and effective monetary policy. how does one assure the compliance of that precondition? since the late 90s, most emes have adopted appropriate financial sector supervisory and regulatory regimes, and they have kept up to speed with the adoption of the new international standards. but unconventional monetary policies ( ump ) in ae have generated massive, and oftentimes volatile, capital flows in and out of emes. an important fraction of these flows has been relatively stable, as it has been induced by medium to long term growth prospects of emes relative to aes. but a not neglible portion of total capital flows, mostly the result of carry - trade type of transactions, is short term and jittery. all these flows have affected the level and volatility of domestic interest rates, credit and exchange rates, both in nominal and real terms, and have made the implementation of

agustin carstens : emerging markets text of the bagehot lecture by mr agustin carstens, governor of the bank of mexico, at the buttonwood gathering 2013 “ searching for financial stability ”, the economist, new york city, 30 october 2013. * * * it is a great honor to have been invited to deliver this bagehot lecture. quoting from neal irvin ’ s book the alchemists, “ among central bankers ( walter bagehot ) has achieved iconic status for his 1873 book lombard street : a description of the money market … to this day it remains something of a bible for central bankers dealing with a financial panic. ” given that bagehot is our “ galileo ” in central banking, that this year ’ s buttonwood gathering theme is “ searching for financial stability ” and that i am a central banker, i decided to devote my speech to addressing the challenges that emerging market economies ’ central banks are facing in today ’ s extraordinary times. let me start by stating that central banking has become interesting and fun again. not more than six years ago, it was simple and boring : in the conventional view it dealt with one main objective, – that is, keeping inflation under control, – and in a few cases with the additional objective of abating unemployment ; the central bank was the main institution within the state with the mandate to achieve such objective ( s ) ; and it was also empowered with the instrument to achieve this, namely the capacity to set a short term reference interest rate. the flexible inflation targeting regime seemed to work extremely well. asset price considerations and financial stability tended to play a secondary role. but this ideal world changed substantially, and indeed abruptly, in 2008 with the financial crisis that erupted just a few blocks away from here. advanced economies entered into a major and ongoing crisis. in a context of profound economic, financial and political problems, central banks in advanced economies have played a leading role in the crisis resolution process - a role that some experts claim has “ overextended ” or “ overburdened ” central banks. oftentimes one hears in some regions and countries affected by the crisis that they, the advanced economies ’ central banks, are “ the only game in town ”. all these events certainly have had an impact on emerging market economies ( emes ). it is true that during the crisis emes have in general performed well, and they have proven to be resilient, based on strong fundamentals. no doubt emes have