Domestic securities markets and monetary policy in Latin America: overview and implications

During the last decade, Latin American economies have transformed their monetary policy arrangements. Most countries in the region have given their monetary authorities more independence and/or developed policy frameworks that put greater emphasis on controlling inflation. Furthermore, monetary operations have shifted towards market-based frameworks. These arrangements should in principle be better and more efficient than previous ways of conducting monetary policy. However, their effectiveness depends to a large extent on the existence of developed financial systems that offer monetary authorities the choice of markets in which to operate and guarantee that actions in short-term markets will spread effectively to other market segments. The development of domestic securities markets and, more generally, the range of issues affected by the ongoing changes in the financial system not only have helped complete markets, but have also modified the impact and the extent of monetary control. In particular, such changes are likely to have altered the transmission mechanism of monetary policy. However, whether new financial developments have strengthened or weakened the impact of policy measures is open to debate.