The Great Experimentation with Unconventional Monetary and Financial Policy
At this Cusco yearly meeting we decided to focus mostly on emerging markets, in particular on Latin American, to emphasize their resilience and vulnerabilities to external shocks from important changes in the monetary policy stance of the U.S. Federal Reserve. Here the Eurozone crisis was not featured prominently in the discussion neither as a source of possible negative contagion or a drag on global aggregate demand. There was a general consensus that emerging markets may have been affected disproportionately by the expansionary monetary policies led by the Fed resulting in large capital inflows and that they were left vulnerable to reversals in the policy stance, although several participants indicated that structural and not cyclical factors have dominated capital flows to emerging markets. The ensuing foreign exchange reserve built-up was seen with trepidation though the advantages of large reserve holdings were stressed. Generally there seems to have been a divide between private market participants emphasizing the vulnerabilities of emerging markets and policy makers' greater confidence in their ability to manage the slowdown of the international economy. Views on the effectiveness of financial regulation and macro prudential measures were mixed though several participants supported the need for tighter financial regulation. On the financial architecture side, there was a support for multilateral measures.