International Monetary Fund
May 2017
International Dimensions of Monetary Policy
Eighth BIS CCA Research Conference
Alejandro WernerDirector
Western Hemisphere Department
Spillovers to Domestic Interest Rates
Spillovers to Capital Flows and Exchange Rates
Financial Stability Issues
3
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
90
MEX
AR
G
PER
BO
L
CR
I
CH
L
CO
L
UR
Y
BR
A
LA
5
HK
G
ISR
CA
N
SW
E
KO
R
AU
S
ZA
F
AD
V
EM
E
From the Federal Funds Rate to Domestic Short-Term
Interest Rates (basis points)
0
20
40
60
80
100
120
140
MEX
AR
G
PER
BO
L
CR
I
CH
L
CO
L
UR
Y
BR
A
LA
5
HK
G
ISR
CA
N
SW
E
KO
R
AU
S
ZA
F
AD
V
EM
E
From 10-Year U.S. Treasury Bond Yields to Domestic Long-
Term Interest Rates (basis points)
Source: Carrière-Swallow, Y. and B. Gruss, “Implications of Global Financial Integration for Monetary Policy in Latin America”, chapter 4 in Challenges for Central Banking: Perspectives from Latin America.
Note: Responses in basis points following a 100 basis point increase in the corresponding U.S. rate. Red bars mean statistically significant. ADV = advanced economies; EME = emerging market economies; LA5 = Brazil,
Chile, Colombia, Mexico, Peru.
While the US policy rate changes affect mainly the Mexican and Canadian
short-term rates…
… there are significant spillovers from long-term rates across the board.
Spillovers to Domestic Interest Rates
Spillovers to Capital Flows and Exchange Rates
Financial Stability Issues
5
Sources: Haver Analytics; IMF, Balance of Payment Statistics Yearbook database; and IMF staff calculations.
Note: The response to US monetary shock corresponds to the implied change in capital inflows to LA7 countries if US monetary policy tightens unexpectedly by 50 bps. Ratios in
percent of GDP refer to trend GDP in U.S. dollars.
0
1
2
3
4
5
6
7
8
0
50
100
150
200
250
300
350Perce
nt o
f GD
PU
S$ b
illio
nLA7: Gross Capital Inflows
Average 2011–14
Initial
(latest)
Response to
U.S. monetary
shock
After
shock
0
50
100
150
200
250
300
0
10
20
30
40
50
60
70
Jan. 05 Jan. 07 Jan. 09 Jan. 11 Jan. 13 Jan. 15 Jan. 17
U.S. economic policy
uncertainty index (right scale)
Global economic
policy uncertainty
index (right scale)
VIX
6
Global policy uncertainty have risen noticeably over the past year, seemingly
at odds with declining measures of volatility in major equity markets…
Sources: Bloomberg L.P.; and Haver Analytics;
Note: The economic policy uncertainty index for the United States and Global were developed by Scott Baker
and Nicholas Bloom of Stanford University and Steven Davis of the University of Chicago (2012).
… presenting risks to capital flows if market volatility (VIX) catches up with
policy uncertainty.
Sources: Haver Analytics; IMF, Balance of Payment Statistics Yearbook database; and IMF staff calculations.
Note: The “response to VIX shock” corresponds to the implied change in capital inflows to LA7 countries if
VIX increases to close the gap with the U.S. economic policy uncertainty index (this corresponds to a 10-
point shock to the VIX, from its current level ([15] to 25 points). Ratios in percent of GDP refer to trend GDP
in U.S. dollars.
0
1
2
3
4
5
0
20
40
60
80
100
120
140
160
180
200
220
Perce
nt o
f GD
P
US$ b
illio
n
LA7: Gross Capital Inflows
Initial
(latest)
Response to
VIX shock
After
shock
7
0
50
100
150
200
250
300
350
400
0
10
20
30
40
50
60
70
2000 2002 2004 2006 2008 2010 2012 2014 2016
Brazil (right
scale)
Mexico
(right scale)
Peru
Colombia
Chile
Total Reserves Assets
(US$ billions)
Sources: IMF, World Economic Outlook database; and IMF staff calculations.
0
2
4
6
8
10
12
14
1990 1995 2000 2005 2010 2015
Hard peg Soft peg Flexible
Exchange Rate Regimes in Latin America
(Number of countries by regime)
Sources: IMF, Annual Report on Exchange Arrangements and Exchange Restrictions; and IMF staff
calculations.
8
When coping with inflows and reserve accumulation:
Rules-based approach (Colombia and Mexico)
Ad-hoc approach
When coping with outflows/depreciation pressures, largest economies
in the region tend to rely on pre-announced rules-based approach for
foreign exchange sales
Announcing the intervention is in principle preferable from a signaling
perspective
Transparent rules can alleviate fears FXI send mixed signals about
commitment to inflation target/primacy of inflation objective
9
Source: Druck, Magud, and Mariscal (2015).
Note: The horizontal axes denote time intervals of dollar appreciation and depreciation cycles of various lengths, sub-divided into four equal parts. These dollar cycles are identified using a regime-switching Markov
model. Each cycle is between 3 and 9 years in length. In the source paper, similar charts are shown for other regions.
90
100
110
120
130
140
150
t=0 t=1 t=2 t=3 t=4
LAC: Average Real GDP
(index: t-1 = 100)
Appreciation
Depreciation
100
110
120
130
140
150
160
170
180
190
t=0 t=1 t=2 t=3 t=4
Asia: Average Real GDP
(index: t-1 = 100)
Appreciation
Depreciation
Spillovers to Domestic Interest Rates
Spillovers to Capital Flows and Exchange Rates
Financial Stability Issues
11
Sources: Dealogic; and IMF staff calculations.
Note: Data for Brazil include issuance by foreign subsidiaries of Brazilian firms.
0
15
30
45
60
75
90
2004 2006 2008 2010 2012 2014 2016
Brazil Chile
Colombia Mexico
Peru
LA5: Nonfinancial Corporates Foreign Bond Issuance
(US$ billions; 12-month rolling sum)
20
21
22
23
24
25
26
27
2006 2008 2010 2012 2014 2016
Mean
Median
2016:Q2
LA: Corporate Leverage
(debt to assets; %)
Sources: Bloomberg L.P., and IMF staff calculations.
Note: The results are the median and mean of the nonfinancial corporates of Argentina, Brazil, Chile,
Colombia, Mexico, and Peru.
12
0
50
100
150
200
250
300
350
400
450
2010
2015
2016
Marc
h 2
017
2010
2015
2016
Marc
h 2
017
Local currency Foreign currency
Peru
Mexico
Colombia
Chile
Brazil
Currency Composition
(US$ billions)
Sources: Bloomberg L.P.; Dealogic; and IMF staff calculations.
0
100
200
300
400
500
600
700
March 2017
Other nonfinancial
Industrials
Consumer
Materials
Utilities
Energy
Sectoral Composition
(US$ billions)
Nonfinancial Corporates Bond Debt
0
100
200
300
400
500
600
March 2017
CODELCO (CHL)
ECOPETROL (COL)
Comision Fed Elec (MEX)
Eletrobras (BRA)
Selected Quasi Sovereigns
(US$ billions)
PEMEX (MEX)
Petrobras (BRA)
13
0
250
500
750
1,000
1,250
1,500
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17
Latin America Argentina
Brazil Chile
Colombia Mexico
Peru
Corporate Spreads
(basis points)
Source: Bloomberg L.P.
Note: J.P. Morgan CEMBI Broad Diversified Index; U.S. dollar-denominated corporate bonds.
Source: Bloomberg L.P.
Note: Ecopetrol data is implied CDS spread calculated by Bloomberg L.P.
0
50
100
150
200
250
300
350
400
450
So
vere
ign
Co
delc
o
So
vere
ign
Eco
petr
ol
So
vere
ign
Pem
ex
Chile Colombia Mexico
CDS Spreads
(5-year; basis points)
Markers: March 2016
Bars: March 2017
0
100
200
300
400
500
600
700
800
900
1,000
So
vere
ign
Petr
ob
ras
Brazil
14
Source: Bloomberg L.P.; and IMF staff calculations.
Note: Scenario 1 = increase global market volatility (doubling of the VIX from its current level). Scenario 2 = increase in sovereign CDS spreads and currency depreciation (based on a
reversal of the trend observed in these two variables since 2016Q1, except for Mexico where the currency depreciated further by 11 percent over that period.)
0
200
400
600
800
1,000
1,200
1,400
Sce
nari
o 1
Sce
nari
o 2
Sce
nari
o 1
Sce
nari
o 2
Sce
nari
o 1
Sce
nari
o 2
Sce
nari
o 1
Sce
nari
o 2
Sce
nari
o 1
Sce
nari
o 2
Brazil Chile Colombia Mexico Peru
After shock 2017Q1 (Initial)
Corporate Spreads: Scenario Analysis
(basis points)
International Monetary Fund
May 2017
International Dimensions of Monetary Policy
Eighth BIS CCA Research Conference
Alejandro WernerDirector
Western Hemisphere Department