By Federal Reserve Bank of Atlanta
Read or Download BIS Papers No 36 New financing trends in Latin America: a bumpy road towards stability. Proceedings of a joint meeting organised by the BIS and the Federal Reserve Bank (FRB) of Atlanta in Mexico City, May 2007 PDF
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Extra info for BIS Papers No 36 New financing trends in Latin America: a bumpy road towards stability. Proceedings of a joint meeting organised by the BIS and the Federal Reserve Bank (FRB) of Atlanta in Mexico City, May 2007
The additional degrees of freedom to undertake countercyclical monetary policies and the countercyclical effects that exchange rate fluctuations have on the current account may be entirely washed away by the procyclical wealth effects of currency adjustments (ie their effects through the capital account). Furthermore, although exchange rate fluctuations may reduce some sources of volatility, such as currency mismatches in portfolios, these fluctuations may generate other sources of volatility, such as short-term speculative moves.
Exchange rate policies in most of these countries supported industrial and commercial policies to promote export-led growth. 5 200 Real effective exchange rate² AR = Argentina, BD = Bangladesh, BO = Bolivia, BR = Brazil, CI = Côte d'Ivoire, CL = Chile, CM = Cameroon, CO = Colombia, CR = Costa Rica, DO = Dominican Republic, EC = Ecuador, EG = Egypt, ET = Ethiopia, GH = Ghana, ID = Indonesia, IN = India, IR = Iran, JM = Jamaica, JO = Jordan, KE = Kenya, LK = Sri Lanka, MA = Morocco, MX = Mexico, MY = Malaysia, NG = Nigeria, PE = Peru, PH = Philippines, PK = Pakistan, SV = El Salvador, SY = Syria, TH = Thailand, TN = Tunisia, TR = Turkey, TZ = Tanzania, UG = Uganda, VE = Venezuela, ZA = South Africa, ZW = Zimbabwe.
As access to finance eases when the economy is in an upswing, governments may be more inclined to allow the budget deficit to widen, and central banks may allow credit to the private sector to expand. Conversely, when during a downswing external financing contracts and the cost of borrowing rises, private sector credits also contract and non-interest fiscal spending may need to be severely retrenched – all of which exacerbates the recessionary trend in the economy. This reduced capacity to implement countercyclical policies implies that access to international financial flows also affects the real economy, although not by smoothing the business cycle, as anticipated by economic theory, but by magnifying it: inflows often lead to output expansion and outflows to contraction and stagnation (Prasad et al (2003); Kaminsky et al (2004); Stiglitz et al (2006)).