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International Monetary Fund. Western Hemisphere Dept.

Abstract

The global economy is emerging from recession, but the recovery is expected to be sluggish. While financial conditions have continued to improve, many markets remain highly dependent on public support, and downside risks prevail. In the United States and many advanced economies, growth and employment will remain weak in coming years. In turn, Canada has shown comparative resilience despite sizable shocks. A permanent loss in potential output, weak private consumption, and much higher debt levels in the United States will be negative legacies of the crisis that could adversely affect the Latin America and Caribbean region.

Mario I. Blejer and Alfredo M. Leone

Abstract

It is not an easy task to find many areas in economics where almost full agreement has emerged in the last few years. However, there is today a widespread and growing consensus that the single most important goal of monetary policy should be the pursuit of price stability. Reflecting this recognition, an increasing number of central banks have been granted independence and charged with the exclusive objective of controlling inflation and preserving the stability of prices. But embracing price stability as the explicit primary goal for monetary policy does not preclude the adoption of different operating mechanisms, and the choice of monetary regime that will best serve the objective of price stability has, indeed, generated much debate.

Agustín G. Carstens and Alejandro M. Werner

Abstract

The recent currency and financial crises in emerging markets have reignited the debate on viable exchange rate regimes for small, open economies. One common element in all of these crises was the adherence to a predetermined exchange rate. Thus, several analysts have concluded that only under very specific and demanding conditions might there be a comfortable middle ground between a floating exchange rate and the adoption of a common currency. In Latin America this polarization in the choice of exchange rate regimes is clearly represented by the different paths taken by Argentina and Mexico. After more than four years of experience with a floating exchange rate regime, Mexico provides an interesting case study for other emerging economies considering moving toward a more flexible exchange rate regime.

Abstract

Since the 1980s there has been a growing consensus worldwide on the importance of price stability as the overriding long-term objective for monetary policy. This consensus stems in part from the fact that monetary policy can produce effects in the real economy only in the short run. Expansionary monetary policy may lead to higher levels of employment and economic activity, but only until businesses and workers start to react, adjusting their price and wage expectations accordingly. Thereafter the only result is higher inflation, with no output gains. More recently, empirical evidence has shown a negative correlation between high inflation and economic growth, suggesting that the best goal for monetary policy is to promote price stability.