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