During the 13th and 16th of November, the Latin American Shadow Financial Regulatory Committee (CLAAF) held their second meeting of the year in Lima with the purpose of discussing the effect of the currency wars on the Latin American region. As a result of the meeting, we presented the 23rd CLAAF statement. The statement has been extremely well received and broadly covered by the Peruvian press. The members of CLAAF that participated in the meetings were:
- Guillermo Calvo, Professor, Columbia University; Former Chief Economist, Inter-American Development Bank
- Pedro Carvalho de Mello, Professor, ESALQ, Universidade de São Paulo; Former Commissioner of Comissão de Valores Mobiliários, Brazil
- Guillermo Chapman, Chairman & CEO, INDESA; Former Minister of Planning and Economic Policy, Panama
- Pablo Guidotti, Dean, School of Government and Professor, Universidad Torcuato di Tella; Former Vice-Minister of Finance, Argentina
- Alberto Carrasquilla, Executive Director of Konfigura Capitales; Former Minister of Finance, Colombia
- Roque Fernandez, Professor, Universidad del CEMA; Former Minister of Finance, Argentina
- Explore an agreement with China to establish some degree of exchange rate policy coordination. In fact, possible negotiation forums include the G-20, BRIC-countries meetings, and APEC.
- If coordination with China is not possible, it is appropriate that Latin America’s central banks intervene in foreign exchange markets to help reduce the risk of a sudden appreciation of the region’s currencies.Regarding the exchange rate interventions:
- Central banks should consider a greater role for the yuan as benchmark currency.
- Unsterilized intervention is preferable to sterilized intervention. If sterilized intervention is to be used, it should not be used systematically since it leads to increases in interest rates and, therefore, to further capital inflows. In the case of unsterilized interventions we recommend they be complemented with additional fiscal tightening. To make this fiscal policy more effective, we recommend redirecting public consumption to public investment.
- Recognizing that currency appreciation could affect wages in tradable sectors, we recommend either greater flexibility in wage contracts or a greater compensatory mechanism (to deal with higher payroll costs derived from real exchange rate changes) should be introduced.
- Central banks could also use macro-prudential policies to strengthen capital and liquidity requirements in the financial system, and adopt counter-cyclical financial regulations.
- Some countries have complemented exchange rate intervention with capital controls. Even though capital controls can attenuate exchange rate pressures in some countries, we emphasize that they could also lead to protectionism and to a reversal of the financial and commercial progress achieved in recent years.
- The problems generated by the capital inflows cannot be managed at a country level. It is important to ensure that the investment supported by the capital inflows is of high quality. Therefore, we recommend that the international community further strengthen multilateral development institutions that can actively support Private-Public partnerships that better channel resources towards priority infrastructure projects.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.