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Monetary and financial stability implications of capital flows in Latin America and the Caribbean

Author

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  • Alejandro Jara
  • Camilo Tovar

Abstract

Central Bank participants at the BIS 2008 Open Economies Meeting in Punta del Este, Uruguay, discussed trends in apital flows since 2003 and their monetary and financial stability implications. Capital flows appear to be more benign today than in the past, partly because of a greater share of foreign direct investment and reduced reliance on foreign financing that has contributed to improvements in international investment positions (IIPs). Participants held the view that the economies in the region had become more resilient. For instance, although currency and maturity mismatches are still a concern in some countries, they appear to be less relevant today than in the past. The recent shift in the global financial environment and its regional implications were also discussed. Notwithstanding continuing concerns about risks, the impact of the financial turmoil at the time of the meeting was still limited. Indeed, there was more concern with the risks of a global slowdown than with direct financial contagion. Looking forward, a key issue is how the transition away from the benign global financing environment that characterised the world economy in this decade will unfold. The effects on the region from the global financial turmoil and the associated downturn in economic activity in advanced economies will vary from country to country, and much will depend on specific developments, such as the evolution of commodity prices. In terms of macroeconomic policies in the face of large foreign currency inflows, fiscal and prudential policies to enhance resilience were considered important. It was also believed that sovereign wealth funds could play a useful role. There was less consensus regarding capital controls. Although some argued that they could be effective in the short run, there could be costs in terms of financial market development. Views also diverged on the effectiveness of foreign exchange intervention. Participating central banks agreed that securing financial stability in small open economies required the cooperation of monetary, fiscal and prudential authorities. However, participants expressed concern about possible contagion from the recent financial turmoil operating through foreign-owned banks. In some cases, there was concern that domestic banks with large foreign refinancing needs could also become vulnerable. The document in this volume was written by Alejandro Jara and Camilo E Tovar with the technical advice of Ramon Moreno. We would like to thank all participants at the meeting for their comments and overall feedback. We are greatly indebted to Pablo Garcia-Luna and Rodrigo Mora for their excellent research assistance. Már Gudmundsson made detailed comments on the document. We hope this publication will be a useful contribution towards improving the understanding of the monetary and financial stability implications of capital flows in the region.

Suggested Citation

  • Alejandro Jara & Camilo Tovar, 2008. "Monetary and financial stability implications of capital flows in Latin America and the Caribbean," BIS Papers, Bank for International Settlements, number 43.
  • Handle: RePEc:bis:bisbps:43
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    2. Khemraj, Tarron & Pasha, Sukrishnalall, 2011. "Monetary sterilization and dual nominal anchors: some Caribbean examples," MPRA Paper 34503, University Library of Munich, Germany.
    3. Mahir Binici, 2017. "Capital flows in the post-global financial crisis era: implications for financial stability and monetary policy," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Assessing international capital flows after the crisis, volume 42, Bank for International Settlements.
    4. Rodrigo Cifuentes & Alejandro Jara, 2016. "Facing volatile capital flows: the role of exchange rate flexibility and foreign assets," Chapters, in: Dongsoo Kang & Andrew Mason (ed.), Macroprudential Regulation of International Finance, chapter 11, pages 256-284, Edward Elgar Publishing.
    5. Mahir Binici & Mehmet Yörükoglu, 2011. "Capital flows in the post-global financial crisis era: implications for financial stability and monetary policy," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 319-343, Bank for International Settlements.
    6. Ocampo, José Antonio, 2008. "The impact of the global financial crisis on Latin America," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    7. Bank for International Settlements, 2011. "The influence of external factors on monetary policy frameworks and operations," BIS Papers, Bank for International Settlements, number 57.

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