Description

This document outlines some of the challenges an environment of secular stagnation poses for Latin America. Low growth and tepid investment in advanced economies, as well as China, limits growth potential in the region, highlighting the gaps it has experienced in past decades regarding human and physical capital accumulation. However, the transmission of monetary policy elsewhere in the world to Latin American economies has become lopsided. Whereas the traditional spillovers of low interest rates in the world operates through both appreciating exchange rates and expansionary cross-border credit flows, the peculiarities of the current circumstances imply that the exchange rate channel is more potent. Thus, after enduring high inflation and high interest rates in the past few years, Latin American economies face now the prospects of appreciating currencies and disinflationary pressures. This provides room for monetary policy easing, which is a silver lining to the environment of secular stagnation in the world and limited fiscal space in the region.