Ending Instability

Abstract

Brazil, Chile, Colombia, Mexico and Peru, the so-called Latin American Five (LA5), have set the pace for a region that has weathered the global financial crisis to become one of the strongest emerging markets. How did they manage to achieve this radical change that 20 years ago most would have thought unreachable? This paper argues that many factors — including some luck — played a role, but two crucial elements were central bank institutional reforms and changes to monetary policy frameworks. These far-reaching reforms did not take place overnight and were effective because for more than a decade the LA5 countries maintained responsible fiscal and financial policies that kept vulnerabilities in check. Together, those policies reinforced the ability of central banks to preserve price stability and build credibility so that when the global financial crisis hit, the LA5 central banks could react swiftly and effectively to insulate these economies from the worst of its effects.