The Central Bank and its Difficult Mission

BRAZIL ECONOMICS - Report 03 Feb 2014 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

Emerging countries are being sharply penalized by the markets at the start of this year. The recovery of the advanced economies, especially the American, is reducing global liquidity, which is happening alongside signals of slower growth in China, accentuating the uncertainties. This cycle is the reverse of what happened just after the crisis in 2008, when the industrialized countries experienced deep recessions at the same time that emerging countries, notably China, recovered quickly and then grew strongly. In those years the recovery of the emerging countries was spurred by expansionary fiscal and accommodative monetary policies, which produced good results for a while, but led to growing current account deficits that can no longer be sustained with the new international liquidity situation. Fearing the reactions of the emerging countries’ governments, investors have started to redirect their capital flows, with less going to emerging countries. In January this movement caused a sharp depreciation of these countries’ currencies (Graph 1).

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