Lifetime achievement award: Agustín Carstens

Agustín Carstens has had a profound impact on central banking during his 45-year career. He has made important contributions as an economics pioneer in Mexico, while working at its central bank and its finance ministry, including as governor of the Bank of Mexico from 2010 to 2017. He has also served as an exceptional leader at multilateral institutions, notably during his two spells at the International Monetary Fund and as the first general manager of the Bank for International Settlements to come from an emerging market.

Indeed, Carstens has successfully bridged different worlds: he has connected academic research with the practical application of economics in reality; spanned the transition from exchange rate pegs and money supply targets to floating rates and prudent fiscal and macro-prudential policies; tied best practice between emerging and developed markets; and linked physical cash with experimental future-proof forms of digital money. 

Carstens earned the sobriquet ‘San Agustín’ in his native Mexico, after his oil-hedging scheme mitigated oil price downside risks, so saving his country an estimated $5 billion during the global financial crisis. He has applied many lessons related to public finance, monetary policy, exchange rates and financial systems learned in Mexico to his international roles, including as deputy managing director at the IMF and later on as BIS general manager.

Indeed, Carstens – described by his peers as intensely curious, reliable and innovative, alongside being a pre-eminent strategic thinker – has attained almost unique perspectives on the international economy from his roles in central banking, government and at multilateral agencies around the world. This has given him the perspective of his fellow practitioners as well as the markets’ expectations of central bankers. He has consistently demonstrated his will to implement change based on his strategic vision, so having a profound effect on central banks around the world, including most recently via the BIS’s Innovation Hubs.

“Agustín Carstens has made a name for himself through his outstanding expertise and tireless commitment in the international financial world,” Joachim Nagel, president of Deutsche Bundesbank, tells Central Banking. “Drawing from his experience as former finance minister of Mexico and governor of the Banco de México, Agustín has significantly contributed to the stability and development of the global economy.”

Early life, Chicago and Banxico

Carstens was born in 1958 in Mexico City. He grew up at a time when the Mexican economy transitioned from its ‘economic miracle’ period of high growth to a period of economic instability two decades later. Despite the discovery of large oil reserves in the late 1970s, Mexico lost fiscal control by overloading on hard currency debt to finance social programmes, which became unsustainable when petroleum prices declined. As a result, Mexico struggled to meet its debt repayments and inflation at times exceeded 100% during the 1980s.

Described by his peers as intensely curious, reliable and innovative, alongside being a pre-eminent strategic thinker, Carstens has attained almost unique perspectives on the international economy

It was during this turbulent period that Carstens decided to become an economist. He attended the Instituto Tecnológico Autónomo de México and graduated with a BA in economics (summa cum laude) in 1982. After joining the Bank of Mexico, he pursued scholarship studies in economics at the University of Chicago – an institution known for its support of open markets and prudent monetary policy – where he secured an MA in 1983 and a PhD in 1985. He was advised on his thesis, A study on the Mexican peso forward exchange market, by Michael Mussa, former economic counsellor to the IMF.

Upon returning to Mexico, Carstens held several positions in the central bank’s international department during the 1980s, rising through the ranks to become Banxico’s international treasurer from 1989. In this position he played an important role as the central bank’s representative in Mexico’s negotiations to restructure its Brady bond foreign debt. Brady bonds – named after US Treasury Secretary Nicholas Brady – provided a route to restructure Mexico’s debt, offering a more manageable repayment schedule over a two-decade period.

From 1991 to 1993, Carstens served as the Bank of Mexico’s treasurer where, among his other duties, he was responsible for managing the central bank’s international reserves and conducting open market operations. During these years, the Bank of Mexico still had little in the way of independence from government, frequently intervened in the markets and offered only limited communication to market participants – something that would soon change. Carstens then worked as chief of staff in the governor’s office and was later named head of economic research of Mexico’s central bank, a role he held from 1994 until 1999.

As a result, Carstens had a front-row seat as the Mexican peso crisis struck in December 1994, when the Bank of Mexico was forced to make a sudden devaluation of the peso against the US dollar. The central bank ran out of reserves in its attempt to hold the peso-dollar peg amid a twin balance of payments and banking sector crisis. Resolving the country’s problems would take concerted time and effort that included developing a robust programme with the IMF for fiscal and monetary policies, implementing a floating exchange rate system, enhancing transparency with private sector creditors and directly addressing the issues within the banking system. Carstens was part of the team that negotiated the financial packages with the IMF and the US Treasury, during what proved to be highly formative years for the young economist. Some of the lessons he set out in a paper, Mexico’s monetary policy framework under a floating exchange rate regime, published with Alejandro Werner in 1999.

While Mexican capital controls were dismantled and financial innovation progressed during the 1990s, the size and speed of capital movements increased substantially. Structural reforms, including the privatisation of state-owned enterprises, deregulation and the signing of the North American Free Trade Agreement, which aimed to integrate Mexico more closely with the US and Canada, allowed Mexico to return to growth. But it also over-extended its debt, putting pressure on its peg. Carstens realised sustaining a predetermined exchange rate “became a liability” during a significant shock as Mexico could not defend its currency without damaging a weak banking system that had engaged in excessive financialisation and risk-taking, yet whose depositors were protected by deposit insurance.

As a result, Mexico adopted a flexible currency regime, and the Bank of Mexico embarked on meeting just one objective: to reduce inflation. In pursuit of its new mandate, it raised rates to 86% by March 1995 from 16% in December 1994. And a separate, comprehensive package was put in place to resolve the banking crisis. To help the banks, the Bank of Mexico opened credit lines in foreign currency at a penalty rate, and a programme was set up to recapitalise the banks, with foreigners granted greater participation in the banking sector. Carstens noted that restricting the money supply was insufficient to control prices as, in a crisis scenario, the velocity of money was highly unstable, making the relationship between the monetary base and inflation unstable. Money supply targeting also failed fully to prevent sudden exchange rate depreciations, and the central bank had only limited control of the monetary base in the short term – since, Carstens noted, aggregate demand for notes and coins in circulation exhibited a low interest-rate elasticity in the short term.

Agustín Carstens has made a name for himself through his outstanding expertise and tireless commitment in the international financial world

Joachim Nagel, Deutsche Bundesbank

As a result, the Bank of Mexico switched to a monetary policy based on inflation targeting, an approach being endorsed by an increasing number of central banks around the world. It set about developing strong data capabilities to monitor bank exposures and its communication improved. Indeed, Mexico used a co-ordinated communications offensive across government agencies to explain what went wrong and the steps the authorities were taking to address matters. Maintaining transparency for all stakeholders, including foreigners, and co-ordination over time were viewed as key. Mexico recovered from the crisis and regained access to debt markets, repaying the IMF in 2000, without following up with a precautionary or staff-monitored programme. The lessons would stay with Carstens throughout his career.

To Washington and back

Trust developed during interactions between Mexico and the IMF in those difficult years made Carstens a natural choice to serve as an IMF executive director representing Costa Rica, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Spain and Venezuela between 1999 and 2000. 

The Mexican’s time on the IMF board earned him international perspective, including an in-depth awareness of the needs of different countries. Some of the nations he represented were heavily indebted, such as Nicaragua and Honduras, others such as Costa Rica and Mexico were emerging markets and one, Spain, was a developed country. Carstens also had the opportunity to understand how the IMF worked, something that would prove useful in the years to come. But not before he returned to Mexico in 2000 as deputy finance minister.

Carstens continued to push for sound practices in Mexico in his new role, including fiscal restraint. By 2003, Mexico decided to repurchase its Brady bonds early amid an economic transformation that shifted its economy from one marked by deep debt and recurrent financial crises to one where it was noted as an economic leader among emerging market economies. Mexico gained an investment grade credit status and moved from being a debtor to being a creditor of the IMF. Inflation, meanwhile, remained firmly in the single-digit range – something IMF managing director Horst Köhler said in 2003 was “a tribute to nearly a decade of central bank independence”.

To Washington and back, again

It was at this time Carstens broke through another glass ceiling to become the first Mexican to join the IMF’s management, when he was appointed deputy managing director of the Fund in 2003. Carstens contributed to strengthening the Fund’s work in relation to the financial sector. He created the ‘Public Debt Managers Forum’ to give emerging market debt managers the opportunity to share their experiences and provide input into the Fund’s work on financial stability issues.

The Mexican stressed the importance of well-functioning financial systems to promote growth and development as well as emphasising the economic costs of bank failures. He also made a concerted effort to drive the IMF’s technical assistance work and its efforts to provide useful surveillance and financial assistance to countries, drawing on Mexico’s experiences.

In 2006, Carstens was once again lured back to Mexico, this time becoming the chief economic co-ordinator for the incoming administration of president Felipe Calderón, where he was tasked with framing the new administration’s economic and financial programme. From December that year, Carstens served as finance minister until 2009. But he kept his links with the Fund, serving as chair of the IMF and World Bank Joint Development Committee in 2008 and 2009.

Carstens broke through another glass ceiling to become the first Mexican to join the IMF’s management, when he was appointed deputy managing director of the Fund in 2003

While he was Mexico’s finance minister Carstens oversaw the country’s oil hedging programme that was first put in place in the 1990s. Public sector officials would determine the appropriateness of buying Asian put options as a hedge against a potential future drop in oil revenues caused by a sharp fall in oil prices. A hedge put in place ahead of the global financial crisis resulted in Mexico being insured as oil prices plummeted from peak levels above $140 per barrel to about $40 in less than six months. The result was that Mexico was cushioned from the fallout of the global financial crisis.

Mexico also successfully subscribed to an IMF flexible credit line (FCL), a special facility that comes with no conditionality, worth $47 billion in 2009. The FCL provided another layer of financial support should another crisis emerge. It also represented a ‘seal of quality’ for Mexico’s macroeconomic management. By December 2009, Carstens was put forward and ratified as governor of the Bank of Mexico for a six-year term, starting from January 1, 2010.

Governing the Bank of Mexico

After his return to the Bank of Mexico, Carstens directed the institution to become much clearer in expressing its motivations when making key policy decisions as well as instructing officials to articulate the issues that caused concern at the central bank. Carstens was instrumental in reinforcing a transparent, rules-based approach to monetary policy, which helped strengthen Mexico’s financial system and its credibility with international market participants.

Carstens also quickly moved to establish a financial stability department. This had twin aims: to better ensure regulated entities were compliant with regulations; and to provide sufficient information to judge whether systemic vulnerabilities were developing in the Mexican financial system. The new financial stability unit would determine whether to make appropriate policy recommendations, which included involving other government agencies where required.

Efforts were also undertaken to secure more information on transactions between Mexican companies and their foreign counterparties, particularly related to some exotic derivatives that large corporations had contracted – something that came as a surprise during the financial crisis and impacted volatility on the foreign exchange markets. The aim was to fill any gaps in Banxico’s monitoring that could become potential issues.

The central bank also strove to reinforce the message that there should be no major financial or economic imbalances. The central bank called for Mexico to continue to ensure the sustainability of public debt, something that was also backed by a fiscal responsibility law that limited the size of public imbalances. The flexible exchange rate, first adopted in the 1990s, was kept in place and viewed as an important shock-absorber, and international reserves continued to grow, with an informal target set to secure more than $200 billion, despite a cost of carry. Carstens’s tenure was also marked by continued efforts to modernise Mexico’s financial infrastructure and improve financial inclusion.

IMF leadership bid

Following the forced resignation of Dominique Strauss-Kahn as IMF chief in 2011, Carstens emerged as a leading candidate to take over as head of the Fund. At that time, the IMF has only been led by Europeans from developed economies, with the US taking the top role at sister organisation the World Bank. Carstens received strong support due to his international standing, particularly among emerging market economies, and was shortlisted alongside France’s then-finance minister, Christine Lagarde. Carstens pressed his case, noting that as someone from outside Europe, he could take a more objective perspective to help address the continent’s sovereign debt and banking crisis that had rocked financial stability in the eurozone.

Lagarde ultimately prevailed in the head-to-head contest, becoming managing director of the IMF until 2019, when she took over as president of the European Central Bank. While Carstens’ bid failed, it served to highlight that there was strong talent outside of developed Europe and the US that should also be considered when it comes to leading multilateral organisations. Indeed, Kristalina Georgieva, a Bulgarian national, became the first IMF managing director from an emerging economy when she took over from Lagarde.

Carstens continued his work at the Bank of Mexico, where he maintained its focus on controlling inflation, which remained within the target range for most of Carstens’ term. But he continued to maintain close dealings with the Fund, by chairing its International Monetary and Financial Committee, the IMF’s policy advisory committee, from 2015 to 2017.

The first BIS GM from an EM

Carstens finally achieved the goal of becoming the first official from an emerging market to take the top job at a multilateral organisation when he was named general manager of the BIS in 2017. The Basel-headquartered institution, set up in 1930 to process German reparations after the First World War, was owned by 60 members (Kuwait, Morocco and Vietnam joined in 2020) and acted as a bank for central banks, while also supporting central banks in their pursuit of monetary and financial stability through international co-operation.

Carstens was already well known at the BIS and had been part of its management board since 2011. But before he could start his new role, which was announced a year in advance to give the Mexican authorities plenty of time to find his replacement, Carstens was asked to delay his start to help Mexico ride out a bout of uncertainty caused by the surprise election of Donald Trump as US president. The US was – and remains – Mexico’s most important export destination and Carstens had already anticipated that Trump’s victory would hit Mexico hard. The Mexican peso fell sharply against the dollar as Trump threatened tariffs and inflation in the country soared. Despite Banxico raising rates to 5.75% by December 2016 under Carstens, the fight to conquer inflation was incomplete and needed to be left to Carstens’ successor, Alejandro Díaz de León.

Basel bound

Carstens joined the BIS at a time after it had expended considerable energy on work related to fixing the financial system in the aftermath of the global financial crisis. Much of the BIS’s effort was largely complete, including the development of Basel III, the establishment of new financial stability-monitoring mechanisms and the theoretical basis for new macro-prudential toolkits – although there were still issues related, for example, to non-bank financial institutions.

Carstens told Central Banking in 2021 that he wanted not only to recalibrate the core tasks performed by the BIS for its stakeholders, such as upgrading its programmes to facilitate emergency credit lines to central banks and offer research, training and events related to the climate risk challenge, but also to modernise and open up the Basel-based institution itself, reflecting the trend among central banks to be more transparent.

Carstens asked the BIS team to try to answer deep questions about optimal monetary policy arrangements and conduct more work related to all aspects of innovation, including in financial markets, the economy at large, and the challenges that central banks and supervisors faced due to technological developments.

Carstens also strove to link academic research and practice in economics, noting that theory can serve as an inspiration for policy, while recognising that policy-makers need to translate theoretical concepts into realistic plans of action that consider the political environment, social need, complexity of the real world and practical constraints. “Researchers and practitioners share the same ultimate goal: to design policies that improve the lives of ordinary people,” Carstens told students and faculty members at Corvinus University in 2023, from which he had received an honorary doctorate. “A virtuous circle must be created between theory, research and economic policies.”

Carstens viewed central bank actions as the ‘first responders’ to the Covid-19 pandemic as exemplary. But the BIS chief in 2021 still viewed post-pandemic inflation as “transitory”.  By 2022, his view had changed, and he warned strongly about the dangers of a switch to a ‘high-inflation era’. “The signs are flashing red,” he said in a speech, “Central banks need to bring inflation down before it becomes entrenched.”

The Bundesbank’s Nagel tells Central Banking that Carstens’s leadership during “challenging times” elevated the cooperation between central banks worldwide “to a new level in the face of a global pandemic and the return of high inflation”.

Empowering change

Carstens empowered BIS economists and research staff to investigate why central banks failed to identify the persistence of inflation around the world in the aftermath of the Covid-19 crisis. Its economists ultimately put forward a new explanation for the inflation process under low- and high-inflation regimes, with potentially self-reinforcing transitions. The ‘two-regime model’ has still to become well established, but Carstens argued for central banks to “act decisively” to bring inflation down as central banks “cannot wait for definitive conclusions”.

Carstens also felt that theory had fallen behind practice when it came to innovation related to money and payments. The BIS general manager was aware that the role of money was changing. “The public will demand money that is digital, programmable and capable of moving seamlessly across platforms and countries,” he said. “They will be less tolerant of costly manual regulatory checks and sluggish intermediaries.”

While Carstens’ bid failed, it served to highlight that there was strong talent outside of developed Europe and the US that should also be considered when it comes to leading multilateral organisations

The BIS head believes it is incumbent on central banks to provide money that meets public needs and expectations. Otherwise less trusted institutions, such as stablecoin or crypto asset providers, will likely fill the void. A key element for the BIS’s Innovation Hubs is to experiment with advanced forms of money, including central bank digital currencies and tokenised deposits, to support moves to “meet society’s demand for a superior technological representation of money”, as Carstens puts it. The launch of the Innovation Hubs, in close co-ordination with the board, was aimed at giving a “very clear expression of the institution’s investment in gathering information about technology, and trying to figure out how technological development will affect our business”, Carstens told Central Banking.

The shift coincided with upgrades to the BIS’s own banking technology to handle requests from its clients, including new instruments, such as green bonds. The BIS also supported efforts towards improved cyber resilience. Internally, the BIS needed to be more resilient and better able to provide appropriate solutions to its staff while also attracting a more technologically skilled workforce. The overall approach was wrapped under a strategy termed Innovation BIS 2025.

The Innovation Hubs aimed to tap into non-research talent that was gravitating rapidly towards tech hotspots. The BIS also wanted to create a network for the sharing of details about tech projects being undertaken by member central banks around the world. The BIS took the bold step to co-invest in innovation hubs with host central banks in a bid to expand its global footprint. These hubs, now in seven locations, have conducted experiments in areas such as the interoperability of payments, the use of central bank digital currencies, quantum computing, regtech, suptech and green finance.

Ultimately, Carstens sees a world where massive computing power, cheap and instant communications, high levels of internet connectivity via smartphones, trusted computing techniques, tokenisation, and rapid advances in artificial intelligence and quantum computing will facilitate a finance system centred on the individual – something he described as a “far-reaching democratisation of finance”.

Individuals in this system will expect to conduct financial activities with the same sense of ease, immediacy, privacy, security and reliability that they have in other parts of their lives. But financial services remain relatively siloed. Carstens believes the way to knit transactions and operations in financial services is to bring them onto shared programmable platforms, what he describes as a ‘unified ledger’.

Carstens’ life’s work is an impressive example of global economic understanding and joint progress

Joachim Nagel, Deutsche Bundesbank

Carstens’s vison is for a unified ledger to act as a network of networks that would connect various components of the financial system seamlessly together – with the potential to link central bank and commercial bank money with other assets, thus facilitating instantaneous payment, clearing and settlement of any transaction, across borders. Such a ledger would allow conditionality and be able to bundle a large volume of transactions together.

Carstens summarised his vision in a paper with co-author Nandan Nilekani, describing the future of the financial system as akin to a ‘finternet’. The finternet will allow different financial ecosystems to transact with each other more easily and instantaneously and “empower individuals and businesses by placing them at the centre of their financial lives,” Carstens and Nilekani said.

The future of the finternet has yet to be fully defined. But Carstens’s commitment to continuously drive the development of monetary architecture around the world is not in doubt. “His commitment to a modern, resilient financial architecture deserves the highest recognition,” says the Bundesbank’s Nagel. “We at the Deutsche Bundesbank value his profound knowledge in macroeconomic issues and central banking. Carstens’ life’s work is an impressive example of global economic understanding and joint progress.”