Miguel Fernández Ordóñez: Global rebalancing, asset prices and policy responses Opening remarks by Mr Miguel Fernández Ordóñez, Governor of the Bank of Spain, at the Fifth High-Level Seminar of the Eurosystem and Latin American Central Banks, Madrid, 10 December 2010. *  *  *  Good morning and welcome again. More than three years after the global financial system started to show serious signs of instability and two years after being on the verge of a global economic and financial meltdown, the world economy seems to have avoided that risk, backed by a strong and coordinated policy response. Nevertheless, the strengthening has been uneven and the risk of economic and financial instability is still persistent and significant in some regions, like the euro area. Indeed, it is hard to emphasise sufficiently the challenges ahead and how crucial the present juncture is for the future of our Monetary Union. On the contrary, Latin American economies had learned the lessons from the severe financial and economic disruptions they experienced in the not so distant past, and the challenges they currently face are more similar to those that characterised the period of strong growth prior to the financial crisis. These very different sets of present circumstances make today’s exchange of mutual experiences and policy discussion particularly interesting. The title of today’s Seminar was chosen almost a year ago, but it couldn’t be more timely: Global Rebalancing, Asset Prices and Policy Responses.
However, limiting upward exchange rate flexibility may attract more capital inflows, on the expectation of future appreciations, turning thereby into a self-defeating strategy. In summary, choosing the right policy mix has become a challenging task for many emerging market economies, all the more so in the absence of a globally coordinated policy response. Faced with these uncertain times, Latin American economies are applying a mix of policies to attain their multiple objectives and minimise risks. The mix includes, to differing degrees of intensity, monetary policy tightening, foreign exchange interventions and reserve accumulation, macro-prudential policies and, in some cases, capital controls. The use of capital controls has traditionally been controversial, because they distort markets while their effectiveness is not backed by empirical evidence. But we must acknowledge that there has been a shift in opinion in their favour – at least as a last-resort instrument – even among institutions such as the IMF. In turn, this shift probably reflects a change in the perceived balance of benefits and costs associated with financial excesses. Nevertheless, it is important to bear in mind that capital controls can also entail negative externalities for the global economy. While fully convinced of the benefits of financial globalisation, a topic to which we devoted our Seminar in 2006, I am concerned by the risks of financial deglobalisation arising in the wake of the crisis.