In the wake of the 2008–09 global financial crisis, central banking and monetary policy in many corners of the world came under intense pressure and entered unchartered waters. The breadth and scale of central bank operations have been modified or expanded in unprecedented and even unimaginable ways given the circumstances. Additionally, a fundamental rethinking of central banking and its policy frameworks has been taking place. This volume reflects a multilateral effort to help close the gap in our knowledge in meeting the critical challenges presented by these significant changes, in particular, those confronting central banks in Latin America. The volume’s first section provides a panoramic overview of the policy progress made to date and the challenges that lie ahead. The related issue of spillovers and monetary independence is taken up more fully in the next section. The final section presents chapters that reexamine macroprudential and monetary policies and policy frameworks from the perspective of central bank staff members from the region.


The challenges facing emerging market central banks in many ways are as complex as those confronting the issuers of major international currencies, and nowhere is this more evident than in Latin America. This volume provides a broad overview of the principal issues facing the region’s monetary authorities, together with detailed consideration of the impact of spillover effects, and an examination of these issues’ implications for their policy frameworks. It is an excellent and timely contribution to a highly relevant policy debate.

—John Lipsky

Johns Hopkins University School of Advanced International Studies Former First Deputy Managing Director, International Monetary Fund

Latin American economies have made substantial progress in monetary policy. Independent central banks with a firm handle on inflation and flexible exchange rates were key to successfully weathering the global financial crisis. This book is an excellent contribution toward helping us understand the challenges facing central banks in the new economic landscape, and analyzes prescient issues such as the autonomy of monetary policy in the context of spillovers and the role of macroprudential policies in addressing financial stability challenges. There is a lot to learn from this book.

—José De Gregorio

University of Chile Former President, Central Bank of Chile

Having tamed inflation, Latin American central banks face a new challenge: Whether and how to move on from inflation targeting, without losing their dearly acquired credibility? If you want to know where they stand, on monetary versus macroprudential policy, on the handling of capital flows, etc., you cannot do better than to read this extremely interesting and well-informed book.

—Olivier Blanchard

Peterson Institute for International Economics Former Chief Economic Counsellor, International Monetary Fund

Future monetary historians will divide the history of central banking into before and after the global financial crisis of 2008–09. Before, central banks would quietly steer the monetary ship through low-inflation waters without worrying about much else. After, a perfect storm forced central banks to desperately try to prevent the ship from sinking by resorting to new, untested, and controversial monetary navigation methods. Did they go too far? Did the new “unconventional” instruments work? Was hard-earned autonomy lost in the process? This fascinating volume offers a first look at these critical issues through the lenses of five major Latin American central banks. After reading this book, it is hard to escape the feeling that perhaps a century of trials and tribulations in the region has helped central bankers to navigate these uncharted waters with more aplomb, ingenuity, and resourcefulness than many of our neighbors to the north. In this new era, learning has become a two-way street.

—Carlos A. Végh

Fred H. Sanderson Professor of International Economics

Johns Hopkins University

Title Page

Challenges for Central Banking

Perspectives from Latin America


Yan Carrière-Swallow

Hamid Faruqee

Luis Jácome

Krishna Srinivasan


© 2016 International Monetary Fund

Cataloging-in-Publication Data

Joint Bank-Fund Library

Names: Carrière-Swallow, Yan. | Faruqee, Hamid. | Jácome, Luis Ignacio. | Srinivasan, Krishna, 1965- | International Monetary Fund.

Title: Challenges for central banking : perspectives from Latin America / editors: Yan Carrière-Swallow, Hamid Faruqee, Luis Jacome, Krishna Srinivasan.

Description: Washington, DC : International Monetary Fund, 2016. | Includes bibliographical references.

Identifiers: ISBN 9781513591766 (paper)

Subjects: LCSH: Banks and banking, Central – Latin America.

Classification: LCC HG2710.5.A7C46 2016

978-1-51359-176-6 (paper)

978-1-47553-682-9 (PDF)

978-1-47553-681-2 (ePub)

978-1-47553-684-3 (Mobipocket)

The views expressed in this book are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Please send orders to

International Monetary Fund, Publication Services

P.O. Box 92780, Washington, DC 20090, U.S.A.

Tel.: (202) 623-7430 Fax: (202) 623-7201

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Internet: www.elibrary.imf.org



  • Foreword

  • Acknowledgments

  • Contributors

  • 1 Introduction: Latin America’s Central Banking Challenges—Past, Present, and Future

    • Hamid Faruqee and Krishna Srinivasan


  • 2 A Historical Perspective on Central Banking in Latin America

    • Luis I. Jácome H.

  • 3 Central Banking in Latin America: The Way Forward

    • Yan Carrière-Swallow, Luis Jácome, Nicolás Magud, and Alejandro Werner


  • 4 Implications of Global Financial Integration for Monetary Policy in Latin America

    • Yan Carrière-Swallow and Bertrand Gruss

  • 5 The Impact of the U.S. Term Premium on Emerging Markets

    • Alberto Naudon and Andrés Yany

  • 6 Forward Guidance and Prudence in Conducting Monetary Policy

    • Julián Andrés Parra Polanía


  • 7 Financial Stability Objectives: Drivers of Gains from Coordinating Monetary and Macroprudential Policies

    • Jessica Roldán-Peña, Mauricio Torres-Ferro, and Alberto Torres

  • 8 A Brazilian Perspective on Macroprudential and Monetary Policy Interaction

    • Fabia A. de Carvalho and Marcos R. de Castro

  • 9 De-dollarization of Credit in Peru: The Role of Conditional Reserve Requirements

    • Paul Castillo, Hugo Vega, Enrique Serrano, and Carlos Burga

  • Index


Since the global financial crisis, central banking has been undergoing a massive renovation. The crisis brought to light fundamental challenges for central bankers in terms of our purpose, our instruments, and what we hope to achieve. From the lessons learned, we have made progress in rewriting the central banking handbook, as it were, but that handbook is still a work in progress. Innovations such as quantitative easing, macroprudential policies, and the postcrisis capital framework for banks are still in their infancy, and public debate about the appropriate objectives and role of central banks is ongoing in many parts of the world.

That debate about central banking is no less important for emerging markets, including in Latin America. This is both because there are lessons to be learned from others’ experience and because today’s world is so interconnected. An overarching theme that connects us in both advanced and emerging market economies alike is that of setting monetary policies in an increasingly financially integrated world and addressing the underlying challenges that this presents.

At the IMF–World Bank Annual Meetings in Lima in October 2015, I had the pleasure of moderating a panel discussion on central banking challenges in Latin America from the perspectives of the central bank governors from five major economies: Brazil, Chile, Colombia, Mexico, and Peru. There was a strong consensus that central bank independence has been a great accomplishment in Latin America that should not be jeopardized. It has helped deliver low and stable inflation after a long history of countries’ struggling to achieve price stability and, in some cases, experiencing episodes of hyperinflation. Looking forward, concerns have shifted to the challenges of price stability in a world of globally integrated capital markets. A common theme is the volatility of capital flows and the lack of synchronization of cycles in the United States and many Latin American economies. For some, this poses challenges in terms of the independence of monetary policy.

Some challenges are more specific to Latin America. The region has greater exchange rate flexibility than other emerging market regions, so vulnerability to large exchange rate depreciations associated with negative terms-of-trade shocks is to some degree driving a rise in inflation above that observed in the other emerging market regions. Countries dependent on commodities have also had greater vulnerability to terms-of-trade shocks that then spilled over into balance of payments and fiscal challenges.

This volume is timely and important in many respects. As evident from the discussions in Lima with the five governors, Latin America’s central banks have to contend with new challenges in pursuing their policy mandates. They are doing so at a time when many of the traditional paradigms associated with central banking are in flux. The identification of those new challenges suggests a new agenda for research and policymaking, especially in terms of maintaining financial stability and containing international spillovers.

For the inflation-targeting central banks in Latin America, this volume brings together a discussion of core challenges such as monetary autonomy and spillovers with highly integrated financial markets, including issues such as exchange rate pass-through, managing market expectations, and the use of forward guidance.

From a financial stability perspective, how and when to use macroprudential policies and how to best coordinate with a flexible inflation-targeting framework are as much of an issue in Latin America as in the United Kingdom. But there are some differences in the challenges facing central banks in Latin America, such as the role of foreign capital flows with shallower domestic markets and the impact of a high degree of dollarization on their financial systems.

This book also addresses the link between macroprudential and monetary policy—a subject that is much debated in both advanced and emerging market policy circles. Macroprudential policies are increasingly seen as a first line of defense (along with microprudential supervision) to address concerns about financial stability, but experience with these tools is still nascent, and we have not accumulated enough evidence through a credit cycle to make definitive judgments about optimal policy. In that sense, this book makes a contribution to the discussion of a topic on which views are not yet conclusive, and from the distinct perspective of regional policymakers and researchers.

Finally, producing an authoritative volume such as this requires considerable analytical work and coordination (much of it behind the scenes), particularly by the staff of the IMF’s Monetary and Capital Markets Department and Western Hemisphere Department. In addition, the joint work between the staffs of the IMF and of the five central banks that contributed to this volume reflects a broader, conscientious effort to build a closer intellectual partnership between the Fund and its members in Latin America—an effort that I observed during my time as a Deputy Managing Director. In a way, this collaboration represents a deeper type of engagement—not one of the IMF giving policy advice, but rather of building a shared understanding of the issues as a stepping stone to developing policy strategies together. It is a good example of the IMF’s seeking to become more agile, integrated, and member-focused to better engage and serve its membership in pursuit of its global mandate.

Minouche Shafik

Deputy Governor

Bank of England


The editors are grateful to Alejandro Werner and José Viñals for their unwavering support of research on central banking issues in Latin America and of this project in particular. This collaboration would not have been possible without the support of central bank governors Agustín Carstens (Mexico), Ilan Goldfajn and Alexandre Tombini (Brazil), José Darío Uribe (Colombia), Julio Velarde (Peru), and Rodrigo Vergara (Chile). Under their leadership, senior staff members across the various central banks have been able to dedicate valuable time to study the critical questions that make up this volume. Indeed, the governors themselves participated in a seminar on the topic of this book during the 2015 Annual Meetings of the International Monetary Fund in Lima, Peru, which was moderated by Minouche Shafik, Deputy Governor of the Bank of England.

The editors gratefully thank Maria Gutierrez and Andrea Herrera for their dedication and graceful assistance throughout the process; Rocio Arevalo and Modupeh Williams for helping organize the seminar in Lima; and Zohair Alam, Steve Brito, and Genevieve Lindow for excellent research assistance. Michael Harrup, Joanne Johnson, and Patricio Loo of the IMF Communications Department provided invaluable inputs to the editorial process and production of the book.


Carlos Burga is an Economist in the Monetary Programming Department of the Central Reserve Bank of Peru.

Yan Carrière-Swallow is an Economist in the Western Hemisphere Department of the International Monetary Fund.

Paul Castillo is Deputy Manager for Monetary Policy at the Central Reserve Bank of Peru.

Fabia Aparecida de Carvalho is an Advisor in the Research Department at the Central Bank of Brazil.

Marcos Ribeiro de Castro is an Advisor in the Research Department at the Central Bank of Brazil.

Hamid Faruqee is a Division Chief in the Western Hemisphere Department of the International Monetary Fund.

Bertrand Gruss is an Economist in the Research Department of the International Monetary Fund.

Luis I. Jácome H. is a Deputy Division Chief in the Monetary and Capital Markets Department of the International Monetary Fund.

Nicolás Magud is a Senior Economist in the Western Hemisphere Department at the International Monetary Fund.

Alberto Naudon is the Chief Economist at the Central Bank of Chile.

Julián Andrés Parra Polanía is a Senior Researcher in the Research Unit of the Central Bank of Colombia.

Jessica Roldán-Peña is Manager of Monetary Research at the Central Bank of Mexico.

Enrique Serrano is a Senior Economist in the Monetary Programming Department at the Central Reserve Bank of Peru.

Krishna Srinavasan is a Deputy Director in the Western Hemisphere Department of the International Monetary Fund.

Alberto Torres is Head of Public Credit at the Ministry of Finance of Mexico. At the time of writing, he was Chief Economist at the Central Bank of Mexico.

Mauricio Torres-Ferro is an Economist in the Research Department of the Central Bank of Mexico.

Hugo Vega is Head of Monetary Programming at the Central Reserve Bank of Peru.

Alejandro Werner is the Director of the Western Hemisphere Department of the International Monetary Fund.

Andrés Yany is a graduate student in the Economics Department at Stanford University. At the time of writing, he was an Economist in the Macroeconomic Analysis Department at the Central Bank of Chile.