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CGD’s work in this area focuses on strengthening financial systems in development countries through innovation and regulation.
Greater access for the poor to the formal financial system—including payments, savings, credit, and insurance—can greatly improve household stability and development prospects. CGD examines how to strengthen, broaden, and deepen financial systems in developing countries through innovation and regulation. We also study the effects of financial crises, to avoid and mitigate future shocks, and how developing countries can improve their business climates to spur inward investment.
Latin America has benefited in recent years from an unprecedented and prolonged episode of extremely low interest rates in the US and other high-income economies. Most Wall Street analysts and multilateral bank economists agree that, led by the US, this episode is coming to an end with return of what was once regarded as a normal global macro environment: higher interest rates in advanced economies and lower commodity prices.
How will Latin America weather the return to normal? There is no consensus. Some experts argue that improvement in macroeconomic policies (especially greater exchange rate flexibility) will pay dividends and the region will continue on a solid, albeit lower and sometimes bumpy path of economic growth. Others warn that the return of normal will expose hidden fragilities that in some countries could result in serious economic instability.
CLAAF members will present their views on this debate and will answer the following questions, among others:
How should Latin America’s performance be assessed? Are the typical indicators of fiscal and monetary strength adequate or are we missing an important part of the story?
Can local-currency denominated financial instruments developed in the region during the period of prolonged low international interest rates be sustainable with the return of normal conditions?
How will a less favorable international economic climate and political pressures to sustain high growth rates (in a heavy electoral period in the region) interact to determine outcomes?
Hey international community, so you’re feeling helpless as you watch the debt limit crisis unfold in Washington? Here’s something you can do about it.
With the world’s economic policymakers in Washington this week for the annual meetings of the World Bank and IMF, there is no shortage of commentary from foreign officials about the dire impact of a US government debt default (see here, here, and here), including the harm already done in the form of spikes in borrowing costs for their governments.
Social capital can help reduce adverse shocks by facilitating access to transfers and remittances.This study examines how various measures of social capital are associated with disaster recovery after the 2008 Sichuan earthquake.
For almost half a decade, the aggressive expansion of liquidity by advanced economies’ central banks aimed at reigniting growth has fueled a surge of capital inflows into Latin America. Under the influence of dizzying terms of trade and extremely low world interest rates, the region’s central banks tried to prevent excessive domestic credit expansion by increasing intervention in foreign exchange markets, raising reserve requirements and, in some cases, imposing capital controls. The role of fiscal policy remained extremely limited.
But, as key commodity prices appear to have peaked and growth in Europe remains non-existent is the current policy stance in the region appropriate? The CLAAF members will deal with this issue by addressing, among others, the following questions:
Should Latin American countries continue with the current policy mix in the expectation that increasing global liquidity will eventually deliver growth in advanced economies, which will in turn support the region’s economic activity? What are the risks for the region’s financial stability if it continues down this path?
If, alternatively, policymakers reduce barriers to capital inflows to boost economic activity, will they compromise the strength of the financial system?
By implicitly pursuing multiple goals, do central banks run the risk of jeopardizing their credibility?
If the advanced economies recover and global liquidity is drastically reduced, can Latin America deal with such reversal? What should be the priorities to assuage the effects of a sudden stop of inflows?
Are low international interest rates inducing a mispricing of risk in Latin America?
A number of Andean countries stand out in their successful use of macroprudential financial regulations. This paper focuses on three: countercyclical capital requirements, countercyclical loan-loss provisioning requirements, and liquidity requirements.