José De Gregorio: Workshop on financial markets and monetary policy
Opening remarks by Mr José De Gregorio, Governor of the Central Bank of Chile, at the
Workshop on Financial Markets and Monetary Policy, Santiago, 6 August 2010.
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On behalf of the Central Bank of Chile I would like to welcome you all to this workshop on the
interactions between financial markets and monetary policy. We have put together a very
interesting group of papers that are surely at the forefront of research in this area.
The episodes that started to unfold during the second half of 2008 reminded us once more of
the central importance of financial markets for the functioning of the economy. As the crisis
progressed and policy makers tried to mount a response that could mitigate the effects on
the real economy, understanding which actions would have the bigger impact at the smallest
possible cost become a key priority. At the same time, gauging how the traditional policy
actions would affect the economy in a scenario of deep disarray of financial markets also
become an important priority in Central Banks and Treasury Departments around the world.
The collection of papers that will be presented here today try to illuminate different features
of the policy dilemmas I just mentioned. They are then a very welcome contribution.
To some extent economists lacked a clear theoretical framework to understand the role of
financial markets as both an originator and propagator of shocks when the crisis started. The
paper by Professor Nobuhiro Kiyotaki from Princeton University along with his coauthor Mark
Gertler builds a model whose aim is precisely to build such a model that can serve
economists to describe the interactions between developments in financial markets and the
rest of the economy. The framework proposed by Kiyotaki and Gertler is also used by them
to estimate the likely effects that the set of actions undertaken by policy makers that have
come to be known as unconventional monetary policy. Understanding the effect of these non
traditional tools is surely an important issue and helps us to design better policies. The study
of unconventional monetary policies is also the subject of the paper by Javier García-Cicco
who analyses this issue estimating a model for the case of Chile.
As you are well aware, the prominence of unconventional monetary policies during the
2008-2009 crises was due to the fact that the interest rate that most central banks use as its
main instrument were aggressively reduced towards levels very close to their effective lower
bounds. The paper by Martin Bodenstein and his coauthors from the Federal Reserve
studies how an economy reacts to foreign shocks when the interest rate is at its lower bound.
This question is of particular interest to a country like Chile which is subject to frequent
changes in the international scenario.
The papers to be presented by Luca Dedola from the European Central Bank and Óscar
Jordá from the University of California-Davis are part of a very active literature that studies
the determination of nominal exchange rates incorporating insights from recent
developments in the theory of financial markets. On line with developments on financial
markets theory, the paper to be presented by Craig Burnside shed lights on a central
discussion on the exchange rate dynamics theory. Along with his coauthors they offer an
explanation for the forward premium puzzle in foreign exchange markets, their analysis is
also consistent with opportunities of profitable carry trade strategies. Given the importance of
the nominal exchange rate for an open economy like Chile, these papers are also a very
important and relevant contribution.
As you can see this promise to be a very interesting conference and I invite you to engage in
the discussion and seize the opportunity to learn from this very excellent group of
researchers.
Finally I would like to thank Miguel Fuentes, Diego Saravia and Felipe Labbé for organizing
what promises to be a very interesting workshop.
Thank you.