Changes in policy thinking forced by the crisis

Martin Redrado, Governor of the Central Bank of Argentina spoke on 'Where is global finance heading?Status of the international monetary system and the stake of emerging economies'.

Some interesting points made by him :

* For the first time in recent decades, the emerging world is not at the epicenter of a financial crisis. We, developing economies, were “learners of first resort” that financial stability is a prominent goal for central banks. And, what is most important on the way forward, we are meant to be both the engine of the world economy but also to share the driver’s seat, which is a bigger role that comes with bigger responsibilities.

* Latin America is also playing a growing role in the world economy by being a factor of stability as opposed to what happened in other times in history. Definitely, the region has been better prepared to face this crisis both when comparing with history and with the way other emerging markets are being affected.

* Speaking about financial stability, in my opinion, one of the key structural changes in economic policy is that financial stability is now ranking higher on every central bank goals worldwide. ... ..

* In this regard, the economic literature is lagging behind. If the relationship between economic theory and policy recommendations is reasonably well defined during “normal” times, in times of turmoil, this relationship becomes much weaker. We have reached a point in which economic theory is having a hard time keeping up with praxis. Literature has shown results that are ambiguous or contrary to those produced by the usual “technology”, especially in relation to the approach that relies on the interest rate as the single instrument. Same applies to managed floating exchange rate regimes. Recent empirical papers that refined the analysis started by several academics argue against sharp fluctuations in the domestic currency. Instead, mitigating excessive volatility, especially in developing countries with rather shallow capital markets and limited access to hedging, seems to be an appropriate policy.

This kind of monetary and financial framework that ensures systemic stability has been my main task during the last years. This means giving priority to avoiding "the next crisis" and building buffers to minimize the effects of disruptions. In my country, the decades of macroeconomic instability and recurrent crises were not harmless in terms of welfare.