Mexico Central Bank Chief Calls for EM Policy Response Short of QE

Mr Carstens said the required policy response from EM central bankers would stop short of outright “quantitative easing” — the large-scale buying of financial assets undertaken by the Fed and other developed market central banks.

But it would include exchanging high risk, long-dated assets held by investors for less risky, shorter-dated central bank and government liabilities.

Michael Dooley of Drobny Global Advisors, an investment research firm, wrote a paper for the Bank for International Settlements in September 2014 questioning whether EM central banks could act as market makers of last resort.

He notes that, when a central bank buys assets in the market, it pays for them with its own or the government’s bonds or other liabilities — effectively, pumping money into the financial system.

The operation would only work if market participants believed the government was solvent and that its liabilities would hold their value, as measured, for example, against a foreign currency such as the US dollar.

“As long as the government is solvent and can support the value of the assets, it is just helping people over a bad patch and can sell the assets back later at a profit,” Mr Dooley says.

This might work in Mexico’s case, he says, adding that such policies may well be put to the test there given the “immense” amount of low-interest debt in Mexico’s private sector.

via CNBC

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza