El día de hoy apareció el portal El Monitor de América Latina (enlace en azul), este artículo de Jose Antonio Ocampo. En él se discuten con gran claridad los principales dilemas que enfrentan las autoridades monetarias de América Latina: la inflación de alimentos, la apreciación de las monedas y el deterioro que cabe observar en las principales economías de la región. Al final del ensayo crítica Ocampo con gran severidad al régimen monetario de metas de inflación, pero sa abstiene todavía de proponer una alternativa clara. Sin embargo, no por esta razón, dejan de ser sugerente las preguntas que realiza. ¿Es la apreciación lo único que ofrece el régimen de metas de inflación? ¿es razonable que los bancos centrales tengan cómo único objetivo el control de la inflación o deberían preocuparse estos de otras variables?
On March 18 the United Nations Economic Commission for Latin America and the Caribbean, ECLAC (www.cepal.org), made public an estimate of the effects food inflation is having on Latin America. Despite rapid economic growth, extreme poverty will increase by ten million people this year! This is a dramatic figure and represents more than half of the reduction in extreme poverty that had taken place during the recent economic boom, from 2004 to 2007.
Food inflation is also making the task of managing of monetary policy extremely difficult. Indeed, the mix of two entirely exogenous shocks –food price inflation and a financial crisis in the US—has created a situation in which monetary authorities are the main actors of an unprecedented tragedy. It is true that the theory of inflation targeting says that temporary shocks, such as those associated with a spike in food inflation, should not lead to a reaction by monetary authorities. But there is a clear risk that higher food inflation will get transmitted to wages and other prices, so monetary authorities cannot simply ignore it. And, of course, some Latin American economies are generating their domestic inflationary pressures after several years of rapid growth. However, given the external origin of food price inflation, a contractionary monetary policy would do little to moderate such inflation.
In the second act of the tragedy, the US Federal Reserve enters the scene. Given the sharp reduction in US policy intervention rates, to manage its own financial crisis and the threat (or, I think along with many others, the reality) of recession, interest rate margins between Latin America and the US have widened significantly. This is, therefore, an open invitation to capital inflows and exchange rate appreciation. Central banks can absorb part of the surplus capital inflows through the accumulation of foreign exchange reserves, as most countries in the region have done, but this seems to have been insufficient, and may have invited further capital inflows. Some measure of prudential capital account regulations (reserve requirements or taxes on capital inflows, following the model used successfully by Chile and Colombia in the 1990s) could help, and Argentina, Colombia and, more recently Brazil, have taken some moderate measures in this regard, but none would be willing to use them to the extent that would be necessary to make a significant indent on capital flows.
So, the major outcome has been exchange rate appreciation. This is shown in Figure 1, in which exchange rates are shown in domestic currency per dollar, so down means an appreciation. Four of the six largest Latin American economies have had significant appreciation in recent months (Venezuela is excluded, as it has a fixed exchange rate). Brazil and Colombia had experienced substantial appreciation earlier on, and the currencies of the two countries now look overvalued. The appreciation of Chile and Peru are in line with that of the euro vis-à-vis the US dollar, but Brazil and Colombia have appreciated even in relation to the euro. Argentina and Venezuela are also experiencing real appreciation, through domestic inflation. So, Mexico seems the only large Latin American economy immune to the current malaise, but it is also the one that would be worst hit by US recession.
In recent years, one of the most trumpeted aspects of Latin American performance was that the region was running a current account surplus (not all of countries, of course). The mix of rapid growth with current account surpluses has been common in Asia, but it has been unusual in Latin America, at least since the 1970s. It could be said that it was due to high commodity prices, but then in the past Latin America managed to run current account deficits even when commodity markets were booming, such as during the 1970s. Colombia is already running a sizable deficit, and Brazil joined the deficit club in the last quarter of 2007. Furthermore, excluding Venezuela, Latin America will be running a deficit in 2008. And, if we take out the terms of trade shock, the current account deficit had already gone back in 2007 to the levels of the crisis of the late 1990s and the early part of this decade (see Figure 2).
Source: Author’s estimates based on the database of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC).
Will there be, therefore, a third act of the tragedy in which Latin America returns to its traditional current account deficits and the vulnerability that is associated with them? Certainly the region looks more vulnerable now to the reversal of the favorable terms of trade shock (which, of course, appears solid for the time being). But, furthermore, is nominal appreciation the best that inflation targeting can achieve? If so, it needs a serious revision.
Indeed, ignoring the effects of monetary policy on exchange rates is one of the major flaws of inflation targeting in emerging economies. The elegance of just having one objective looks nice at first, but it ignores the fact that the fundamental challenge of macroeconomic policy is how to manage difficult trade-offs. Multiple objectives and trade-offs also imply the need to use more instruments and to coordinate monetary policy more carefully with fiscal and other policies, which are the responsibility of governments. And, of course, in an orthodox interpretation, a current account deficit is as much a case of excess demand as domestic inflation. Furthermore, and perhaps even more importantly, current account deficits have been an even more important predictor of crises and of the inflationary shocks that accompany large exchange rate depreciations during crises. So, we are back to the basic question: why should inflation be the only objective of monetary policy?